Stop Losses Are For Sissies
by robbooker
I’m not sure that people realize how fast they are going to lose all of their money in currency trading if they move their stops to take bigger losses on a trade—hoping that the currency pair will come back and give them some profit.
Stops—whether mental or actually programmed into your trading software—are absolutely critical. Not having a plan to exit at a loss is simply pure hope. Hope does not turn into profits easily.
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PURE GOLD
by sbenard
The finest trader I know, who has been trading for 35 years, uses DOUBLE stops.
He uses a hard stop loss order just in case of a market catastrophe (a la 9/11) or sudden, unexpected reversal. Adding to what Dr. Forex has explained regarding this high leverage industry, a fall of several hundred pips within a short period IS possible and is likely to occur again in a dangerous world, infrequent as it would be. A loss of several hundred pips on a heavily-leveraged account could do severe damage, potentially even leaving the account owner in the hole. Other bigger fish than I have learned this the hard way.
My friend’s second stop loss is a mental one—and he keeps it extremely tight, less than 10 pips. He says that in Forex, he who loses least, ultimately wins. Rule #1 for him is to stay in the ballgame, and tight stops guarantee he’ll return to play again tomorrow. With only 3-5 pip spreads, its better to exit early on a bad trade and look for a better reentry. A 3-5 pip spread sounds much better to me than a 25-50 pip dip hanging on a prayer that the market will turn again. A mental stop takes great discipline, of course. He has it. He also says that when a losing position starts to create stress for you, it’s time to get out and wait for a better opportunity. When stressed, a trader tends to make mistakes. If a small losing position is closed, the trader can clear his/her head and analyze the market without the stress, making better decisions.
Another phenomenally-successful trader that I don’t know personally has also expressed (in a video I saw of him) a strong sentiment toward stops, including a tight time-related stop. He says if the market doesn’t go quickly in your direction, don’t even wait in a flat market, just get OUT and wait for better conditions. He says that after good analysis, if your position doesn’t prove out, the longer you stay in it, the longer you expose yourself to market surprises that will probably move against you. Thus, better to exit early. His time-oriented stop limits his losses also. Besides, he says, if you exit a stagnant or losing position, then you have more capital to put toward a good one and can devote your mental and emotional energy to finding the good one instead of managing or stressing over a loser.
Risk management is at least as important as psychology and strategy, and stops are part of that. At least that’s what the pros say that I know.
by phreak
Less than 10 pips stop loss… Amazing! The guy probably doesn’t trade forex. He trades market noise instead. If you are a serious trader, your stop losses are not defined by the number of pips, but by support and resistance. In other words your stop loss should be below support and above resistance. How many pips should you stop loss be? It depends of the point of entry. Though you can try to minimize your stop loss by choosing a point of entry close to support or resistance, it shouldn’t be too tight. Be sure market noise won’t hit your stop loss. That’s the biggest disappointment when your position is closed by market noise and then the market moves according to your expectation big time. Tight stop losses kill too many profitable trades, and you can end up in a hole with tight stops just like as without them. When it comes to pips… well, you can try to make them less than 50. But it depends of a currency pair. For example, in case of GBP/USD you may need even more.
by sbenard
First, let me say that I know a few people who have made large sums of money in Forex. ALL use stop losses without exception. One, who someone earlier suggested must not trade currencies, does indeed trade currencies. This is the same person that uses double stops. In another forum in Moneytec, a few foolish know-it-alls challenged his trading method. He set up an live account (no demo), gave his trading system to another trader to trade, and after 200 consecutive trades without a loss and more than doubling the size of his account, he had proved his point.
http://www.moneytec.com/forums/showthread.php?t=10208&page=4&pp=8