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Thread: 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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    Rookie layigold's Avatar
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    Trading without using protective stop loss is like jumping out of a plane without a parachute , you can guess the outcomes yourself . It is very unprofessional to take position without setting a stop loss and that is the habit of so many traders . As long as you know that the control of the market is not in your hand as a trader , you must apply protective stop loss to your trade because in forex trading , anything can just happen . If you do not want to come back and find your entire account wiped out , please protect your capital when you have a cause to take position

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    Trader cutiekc's Avatar
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    What we can do is to learn and know what will work for us which I believe that when we know how to make use of the stoploss and then we make use of it adequately then we can become better. Stoploss is important and when you know good money and risk management will lead to trader being profitable. You should understand what it takes to become profitable trader, always know that if you want to succeed the business, you should master risk management.

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  4. #3203
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    I know the only way when trader trades without stops and it is hedging strategies where the opposite pending order is instead of stop loss. All the other strategies must use stops because large losses can destroy accounts and traders will lose money. Trading without stop loss means that trader does not know where to place stop loss.

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  5. #3204
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    I know the risks that the business has, so I can't trade without the use of protection, as I am not planning to keep on losing my money to the market. As we can see, a lot of traders who don't get to plan themselves properly and then make good use of money and risk management, they often suffer from margin call and it is something we can really get to control if we can be disciplined.

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    Quote Originally Posted by Real View Post
    I know the risks that the business has, so I can't trade without the use of protection, as I am not planning to keep on losing my money to the market. As we can see, a lot of traders who don't get to plan themselves properly and then make good use of money and risk management, they often suffer from margin call and it is something we can really get to control if we can be disciplined.
    That is the power of awareness, those who are aware of the risks entailed in trading will take the necessary precautions in their trading. Even if we carefully plan your lot size it is necessary to use the stop loss because sometimes the market makes heavy one directional move that can cause huge harm to our account or even eat it entirely. It is true without the stop loss neither the expert advisors nor manual trading systems can work well.

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  7. #3206
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    I know how to make use of the stoploss. I know how to manage my risk, it is always important to know the best discipline to follow, I can't trade when I am not making use of stoploss. I don't think it tells any thing good about me, therefore all times, I do make sure to see that I am making use of stoploss, getting to protect my trading account at all cost and then making sure that I am also taking just the best signals.

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    Rookie Rylai's Avatar
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    Quote Originally Posted by Makaveli View Post
    I know how to make use of the stoploss. I know how to manage my risk, it is always important to know the best discipline to follow, I can't trade when I am not making use of stoploss. I don't think it tells any thing good about me, therefore all times, I do make sure to see that I am making use of stoploss, getting to protect my trading account at all cost and then making sure that I am also taking just the best signals.
    Everybody explains the same how they can set their stop loss according to themselves. but it's not everybody who can finally manage their trading to follow their risk management properly because they're scared to lose and always cut their trades earlier before market hits their stop loss. be patient to wait until market hits our stop loss before we close our trades.

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  9. #3208
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    Quote Originally Posted by Rylai View Post
    Everybody explains the same how they can set their stop loss according to themselves. but it's not everybody who can finally manage their trading to follow their risk management properly because they're scared to lose and always cut their trades earlier before market hits their stop loss. be patient to wait until market hits our stop loss before we close our trades.
    Out of majority of traders many dont make use of the stop loss and out of those who use, many dont use it properly enough. The question is not just what we can do here, but what we can do to earn in Foex with lesser risks on our capital. One can trade without stop loss or without strategy but the thing is why should we do things that will put us in trouble.

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  10. #3209
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    The way I have always traded has been the way I have learned. The use of stoploss is among the first thing I learned regarding how to trade the market. Those traders who don't understand how to make use of the stoploss and who don't make use of it because of one reasons or the other, they just end in losing their money and blowing up their account.

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    Rookie ola4real's Avatar
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    Quote Originally Posted by Makaveli View Post
    I know how to make use of the stoploss. I know how to manage my risk, it is always important to know the best discipline to follow, I can't trade when I am not making use of stoploss. I don't think it tells any thing good about me, therefore all times, I do make sure to see that I am making use of stoploss, getting to protect my trading account at all cost and then making sure that I am also taking just the best signals.
    I think that it is all forex traders who supposed to know how to fix their sop loss and even the take profits, that is what all forex traders must be sure that they are doing in order to complete their trading setups. The forex traders who can not trade with their stop loss should be ready to lose all their forex investments at once, that will not be a good idea. Forex traders should be using stop loss, that keeps the account of the trader very secure always.

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