Can you trade with no stops?
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    Can you trade with no stops?

    Hi, traders! Sometimes you can here from anybody - “I’m trading with no stops and I’m closing 95% of my trades with profit”. Looks attractive, doesn’t it?
    In this article, I will uncover some “secrets” of this “high probabilty profit taking” and of course, about it’s unspoken drawbacks.

    According to the “probability theory”, every stream of random data tends to distribute along the “normal distribution”:



    We can observe that 68.8% of data has to fall within one standard deviation, which is equal to around 10-30 pips for fluctuation of price of major currency pairs. The conslusion is that if you set your "take profit" within one standard deviation, you will have around 70% of profitable trades (or more). You are also able to see that according to the normal distribution, probabiliy of the “tail event” (say, rapid change of volatility) is equal to 0.1%, that is highly unprobable. In other words, you will unlikely face this event in your whole life. Is it true? No, that’s not true. Markets tend to be much more volatile and trending substantially longer than it is considered according to probability theory.

    I have made several tests to show you how distribution of profitable/losing trades changes with the change of our stop loss and take profit. Tests are absoultely random, they include absolutely no analysis. I was making one trade after another in a random direction. Take profit and stop loss leves were prefedined.

    Let’s get started.



    1. Test: Profit/loss ratio is equal to 1/1.


    Stop loss and take profit are equal to 10 pips for EURUSD. On a series of 200 iterations, we have distribution looking like shown below:



    What is happening here? We have our equity curve going back and forth. In other words, we generate activity, but have no trading edge. In a long run, such behavior can lead is to losing entrire capital (due to transaction costs).



    2. Test: Profit/loss ratio is equal to 3/1.


    What about 3/1 profit/loss ratio? Can we obtain any profit on a random test in this case? Again, I make 200 random trades on EURUSD:



    You see, that result is negative, but it can be the matter of volatility. In other market conditions, results could have been positive. But low recovery factor of such “trading” can be explained by the fact that we continue trading within 1 standard deviation - our stop is very small and has high probability of being executed, out take profit is also small and has slightly lower probability of being executed. That’s why, we have negative performance. But we have not to be fooled - there’s not enough trading edge here as well. If we apply any analysis, it’s likely that we can improve our results.

    According to my own experience, 3/1 test can show more stable performance, if we move our stop out of the 1 standard deviation and set it, say, on a distance of 30 pips (with 90 pips profit).



    3. Test: Profit/loss ratio is equal to 7/1.


    But if we increase our take profit substantially, guess what happens? It is shown below:



    At the first sight, probability of getting 70 pips profit is substantially lower than for 30 pips take profit, but if you fix 70 pips in a profitable trade, you improve your overall performance! How is it possible? Relative influence of higher (yet, less probable) profit is so that you can turn your trading around and have a trading edge. In statistics, it is called “magnitude”. “Magnitude” is relative influence of a discrete outcome on a whole distribution of results. If you have low probability of event, but substantial magnitude of this event, you can bet of this event, though odds are stacked against you. It explains the fact, that for some trading styles, it is ok to have 90% of losing trades (yet, 10% are very profitable - they cover all the losses)



    4. Test: Trading with no stops.


    Now, let’s see how distribition looks like if we apply no stop and have take profit equal to 10 pips (very probable event):



    You see, we can fix small profits for a very long period of time, but eventually we “catch” long term high or low, setting position againts the market (remember - we don’t have stops, so we let our losers run). If price action is developing against our losing position, we increase our losses and drawdown becomes deeper and deeper. It’s just a matter of time! You can avoid this event for months and even years, but blowing up a captal is unevitable!



    Bottom line:

    High number of profitable trades does not necessarily correlate with profitability. If you hear something like "I close 95% trades with a profit", always ask: "What happens when negative outcome realizes? How much impact on overall perfomance does it have?"

    I hope that this article was helpful! Good luck and have a trading edge!

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    Stop lose is very important for your trading career , some time it is protect our money if our trade against market but many trader not used stop lose but i used it properly for my safe money

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    Well i would like to tell you that most of the trades that i am doing are without the use of Stop Losses. And this i am able to do because i am a Fundamental Trader and as such my trading revolves around using the News data and thus deciding what type of trading would be beneficial to me. If i am able to get a income it is good but when my trades are lost then it does happen that i try to close them manually.

    Trades that are being Negative for us do have a profound effect on the overall trading results and this we will know only when we are estimating the results from a long period of time

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    Quote Originally Posted by nsawork View Post
    Well i would like to tell you that most of the trades that i am doing are without the use of Stop Losses. And this i am able to do because i am a Fundamental Trader and as such my trading revolves around using the News data and thus deciding what type of trading would be beneficial to me. If i am able to get a income it is good but when my trades are lost then it does happen that i try to close them manually.

    Trades that are being Negative for us do have a profound effect on the overall trading results and this we will know only when we are estimating the results from a long period of time
    Do you trade without any leverage?

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    Trading with no stop loss can be done easily. Just use the small percentage of margin to enter order. Just in case just use the 0.1 lot at the 100000000USD account. I needs more pip to get margin call. And I think it never be margin call even had any crazy even like CHF, January, 15. And when the position seems against the trend, just let run. And making another better position than previous.
    WIth this scenario, trader does not need stop loss. Because the price will always make peak to valleya dn valley to peak in several years. CMIIW (correct me if I am wrong)

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    Quote Originally Posted by nsawork View Post
    Well i would like to tell you that most of the trades that i am doing are without the use of Stop Losses. And this i am able to do because i am a Fundamental Trader and as such my trading revolves around using the News data and thus deciding what type of trading would be beneficial to me. If i am able to get a income it is good but when my trades are lost then it does happen that i try to close them manually.

    Trades that are being Negative for us do have a profound effect on the overall trading results and this we will know only when we are estimating the results from a long period of time
    I do not think what you are saying is right. You are trading without stop loss? I do not believe it. It is either two things, Number is that you might be regretting the trades without the use of stop loss, or you have gotten draw down that you can not recover in years. Now, you said you use news trades, are you telling me that all news goes the way you want?

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    I already practice trading with compounding strategy, but without a stop loss, using capital 10 usd, and using TP 10 pips, and the stop loss is a margin call. This is a way of trading is very risky, I developed the capital to 40 usd, then got floating minus, ending with a margin call. Now I always use a stop loss

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    Using stop loss is a good practice no matter what is your trade result. It can help you survive for long in the market. Actually these SL value should be set at such value that you don't lose more than 5% and price need to move at least 80 pips to hit your SL. When you set SL at such long distance in a normal market it would require real cause to hit it. I think it it hits then probably you got a new trend to trade in future. I really liked the article and the pictures you added for probability discussion. As a student and teacher of physics I know it well.

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    I only started making money from forex market when I started using stop loss in my trades. Prior to this I was almost putting my entire account on risk to wait for price to be in green sector. Several of my accounts got washed in this manner. But now I've learnt that using stop loss or cutting your loss is extremely important for your survival in forex market.

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    Trading with no stop loss is a suicide in trading, of course in the early going we may recover most of the time because the market may comeback most of the time, but once it will start to go in the opposite direction we are in deep trouble, perhaps we can trade without stop loss but there must be some kind of time stop where we need to cut our losses, but sometime traders find it hard to cut a losing trade.

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    " Trading is 70% Psychology, 15% Risk Management and 15% Strategy ! "

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