Here is an article of Nial Fuller discussing about the misconceptions of stop loss and position sizing.
Extract from the said article
Stop loss placement is perhaps the most overlooked and misunderstood piece of the trading ‘puzzle ’…
Conclusion
Let me ask you something …
Do you know why most traders fail over the long-run? Well, yes, because they lose too much money. But, WHY do they lose too much money?
The two main reasons why so many traders lose money and blow out their accounts are: Trading too much (over trading) and using stop losses that are too tight (not letting the trade have room).
A funny thing happens when you start placing tight stops, you get stopped out more often! Seems obvious, right? Yet, each day, thousands, probably millions of otherwise very intelligent traders do something really unintelligent; they place a tiny little stop loss on a perfectly good trade setup. They do this because they don’t understand position sizing or they do this because they’re being greedy, either way, they are doomed to fail and be just another statistic.
Don’t be like them.
Be patient. Be willing to place a wider stop even if that means letting a trade go for a few weeks. Ask yourself, what’s better: Placing 20 trades with tight stops and losing on most of them or placing 2 trades with wide stops, winning big on one and taking a predefined 1R loss on the other? I promise you, it’s the latter, not the former.
Its incredible how many young aggressive and suddenly successful traders talk only about pips to the stop, and the smaller the number the better they must think. They never even mention position size or max % risk of account capital.
Most of the traders kill their account because they can’t take a loss a let their few losses grow bigger and destroy their account.
Yes, some of them can do that by over leveraging even with tight stops. But I don’t think this is the main problem.
Yes too thigh stop are bad especially if they don’t consider volatility and daily range movement.
However everyone can learn it quickly if they just risk 0.5% per trade. Take your loss and look for another one. Take your loss and look for another trade. And learn from your losses and your mistakes.
Put tight stops. Per wide ones. Don’t put stops. Who care!
Just rigorously exit your trade if you are losing 1% of your equity at max especially if you are a newbie and are not sure if you have a profitable edge or not.
Of course except you are gambling and are ok with losing your money.
I thought either you didn’t read the complete article of Nial Fuller or you couldn’t understand the whole concept of using stop loss with correct position sizing to avoiding any abrupt price fluctuation.
I would suggest you to read the example given in the said article relating to stop loss and proper usage of position size.
This is a subject as a tookie I have struggled with since I learned to enter a trade or as some would say place a bet. AS you have no definitive clue to exactly what the market is going to do I’ll go with the later and say traders are gamblers. Ok, so I am a gamble.
Once we get that out of the way what has caused me not to be consistently profitable along the road to a positive equity curve? and a great expectancy, there we go again a gambling term.
over trading and 2 not letting winners run 3. letting losers run.
All are the result of greed an emotion.
The answer an in this thread as Neil Fuller put it is cash management, sizing the missing link to exception profits and expectancy.
The reason most novices lose is because they use small take profits and big stop losses or even no stop loss. They think to themselves wow I’m up a few pips I better lock that in with a win! I’m up 1% woo hoo ! Or they think oh crap it’s going against me, I can’t stand closing it at a loss, I’ll let it go, maybe it will turn around, oh no it’s going further in the hole, oh no I’m down 20% I better close it!
Then, as my drawdown got bigger, I started Revenge Trading, over Trading and just grasping at straws! Just fed fuel to the fire and I was left with a Jackson - sorry for the edit… Hamilton, I was left with a Hamilton, $10. I’ve kept that account open. It’s a great reminder.
This was one of the reasons I started trading the dailies. Sitting and watching the price action just sucked me in to making poor decisions and getting too emotionally invested with every single move.
The emotional side of trading is so powerful. It can’t be underestimated or understood until it is experienced in a live account. And I think no matter how long you demo, it will be an eye-opener once you go live.
This is why proper sizing of each trade in relation to your account size is critical. This has a direct relationship and impact on how most people perform emotionally when their trade is on in a volatile situation…
One option is work a demo account and open a small micro account to get a feel for trading live while the risk is minimal.
as has been said above… Every person is different. Every trade is different and how a trader comes to the desk each day is different based on their emotional state.
I think the key thing is to do something. Do something now. Open the demo account, open the Live account, but keep moving forward, researching and learning.
With a micro account you’ll be Trading with very small increments of currency microlots .0.
This would allow you to experiment with all sorts of stops. No stop, wide stop, small stop for a week or a month. Then see how each of those trades played out.
Hey S, I actually was pleasantly surprised by this article. I expected a bunch of platitudes and blah blah, but the use of account size + ATR (Context) is the right way to do it, very refreshing.
I just think no one should place a stop loss at the level where a breakout occurs, because more than likely its going to go right back to that same level before it continues with the trend. So always place it somewhere below or above where ever it breaks out from.
I don’t know about the folks here. But ATR is a very vital tool in my trading arsenal. I always use it’s pip value to adding as a buffer in my SL on different time frames in accordance with my MM rules.
I also take note of it for a valid confirmation while trading breakouts as well as judging the volatility of a currency pair during different trading sessions.
I think ATR is a very effective tool if it is used properly.
Sometimes stop loss like as dilemma for some trader, might any trader had experience when they put stop loss and the price hit these stop loss, but after order already closed then price move bounce back to early track or hit target profit, but if trading without stop loss will worry if the trend against order maybe will getting margin call account, I think need to learn how to determine to stop loss and target profit
