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  1. #1
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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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  2. #11
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    [lang=id]actually i seldom to trade with stop loss, i prefer to trade without stop loss and feel flexible, and to stop losing then cut loss or hedging is my choice. and as long as we can put the order on the right place so we get the right point for making profit, and also the price is like the pendulum and will move back to the first price[/lang]

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  3. #12
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    Great topic to discuss educator sir, I think quantity does not matter in this business. You really explained well that how we can do trade perfectly even by winning 10 trades in forex out of 100 trades. I think risk and reward is very essential part of our trading we should always try to do trade with good risk and reward levels.

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    i always use a stop loss, because I do not always monitor chart. I also use a take profit. so I will be able to exit the market automatically. if no stop loss, I worry floating big minus, and will get a big loss. it will blow up my trading account. stop loss is very important to me

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  5. #14
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    Quote Originally Posted by ngalapreceh View Post
    i always use a stop loss, because I do not always monitor chart. I also use a take profit. so I will be able to exit the market automatically. if no stop loss, I worry floating big minus, and will get a big loss. it will blow up my trading account. stop loss is very important to me
    There are millions of reasons for all traders to use stop loss, I am very surprised that some traders are not using stop loss, but in the truth, if one looks at the trading accounts of such traders, it will either be total lose of stop out, or very large draw down they would not pay in years. It is good to be very careful about the market and protect your trades.

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    Quote Originally Posted by cozard007 View Post
    There are millions of reasons for all traders to use stop loss, I am very surprised that some traders are not using stop loss, but in the truth, if one looks at the trading accounts of such traders, it will either be total lose of stop out, or very large draw down they would not pay in years. It is good to be very careful about the market and protect your trades.
    I agree, using stop-out can be made more secure trading account. do not hold large floating minus, because traders will get a big loss, although prices can be reversed, but it is very risky. I've had a bad experience because it does not use stop loss, so I have to learn from mistake

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    Quote Originally Posted by ngalapreceh View Post
    i always use a stop loss, because I do not always monitor chart. I also use a take profit. so I will be able to exit the market automatically. if no stop loss, I worry floating big minus, and will get a big loss. it will blow up my trading account. stop loss is very important to me
    Yes mate using stop loss is very essential in trading. In forex many trader's loose money because they afraid to loose money and not set any stop loss in trading. But they not focus on their floating minus when they not use stop loss. So we are loosing money that time too, A trader should learn deeply about using stop loss and ignoring stop loss result in forex

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    Quote Originally Posted by cozard007 View Post
    There are millions of reasons for all traders to use stop loss, I am very surprised that some traders are not using stop loss, but in the truth, if one looks at the trading accounts of such traders, it will either be total lose of stop out, or very large draw down they would not pay in years. It is good to be very careful about the market and protect your trades.
    [lang=id]honestly, i seldom to trade with use stop loss, i want to trade more flexible, and it means, i knew the consequences and knew how to recover some problems in front of me, there are some options that we can use besides stop loss, and as long as we understand for what we are doing so i guess there is no problems, and of course, there is advantage and disadvantage from it[/lang]

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    Quote Originally Posted by samprazaan View Post
    [lang=id]honestly, i seldom to trade with use stop loss, i want to trade more flexible, and it means, i knew the consequences and knew how to recover some problems in front of me, there are some options that we can use besides stop loss, and as long as we understand for what we are doing so i guess there is no problems, and of course, there is advantage and disadvantage from it[/lang]
    Sir, you are still saying the same thing, you are flexible in shadows. I would like you to tell me what you are flexible about. If you say that there are lots of ways you can use as an alternative to the use of the stop loss, I expect you to tell me the ways, so that I can reason with your views as well, not that you will say there are ways without stating them.

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    Quote Originally Posted by cozard007 View Post
    Sir, you are still saying the same thing, you are flexible in shadows. I would like you to tell me what you are flexible about. If you say that there are lots of ways you can use as an alternative to the use of the stop loss, I expect you to tell me the ways, so that I can reason with your views as well, not that you will say there are ways without stating them.
    [lang=id]dear friend, from beginning that i have said there are the ways for us to trade and no matter what they are, and if we feel comfortable and just take it, stop loss is the way to limit loses right ? this is the thing to protect balance as the last defense, and also cut loss, some traders use it to protect balance, but they did not judge the order immediately, they want to see the market deeply before make a decision, so here is the meaning of flexible, they can cut loss immediately or they can increase the pips to sustain the order, and also hedging, they did not want to judge the order with loss , so they take the chances with use hedging to lock and wait for good time to unlock it, so i guess, you need to understand the function of them[/lang]

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  11. #20
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    Never i can not trade without stop loss, i have done this before and now i know it is not the best for nay lover of this market. It is forex trading that is talking and traders working for the best should use stop loss. This does not mean that some traders are not making money without stop loss, it depends on how we learned the market and how we apply what we learned.

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