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Thread: Can you trade with no stops?

  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. #3261
    Trader Sascha's Avatar
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    Quote Originally Posted by mexima View Post
    i guess trade with our sl is as same like trade with a driver and your accident can happen any time if you land safe then that will be pure luck and this is all same in forex market if you pur sl then you can minimize you loss for sure but if you will not put loss then your account will 100 danger because first day you can have 10$ next day it can be increase by 100% mean 20$ and so on .
    you can relate forex trading with or without stop loss as walking on a rope. with or without stop loss, there's a chance for you to fall from that rope but at least with stop loss as your safety belt, your life still safe and you can carry on walking on the rope. unfortunately if you trade without stop loss, i mean there's no safety insurance for your life. once you fall, it's all over.

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  3. #3262
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    It is possible, but that is never the best thing to do, because we are in business and so therefore we should have means of protecting our trading account, because when we don't protect our trading account properly, then we could get some losses which will be so much hard for the trader to recover, therefore, I can't trade when I know that I will not be making use of stoploss.

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  4. #3263
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    Well, forex trading gives us that free liberty to do what we like, but it is a trap, come to think of it, in such a volatile market, then one wants to trade without the use of the stoploss, it is a risky thing to be done and then the possible consequences could be the trader losing all their account to margin call. Personally, I can't trade when I know that I didn't make use of risk management stoploss.

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  5. #3264
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    Quote Originally Posted by sniper007 View Post
    Well, forex trading gives us that free liberty to do what we like, but it is a trap, come to think of it, in such a volatile market, then one wants to trade without the use of the stoploss, it is a risky thing to be done and then the possible consequences could be the trader losing all their account to margin call. Personally, I can't trade when I know that I didn't make use of risk management stoploss.
    without risk management we can do trade but the issue is we can not survive just if we have management, without management and stop loss we can lose big or all, so make sure you practice to learn but after learning you must make some proper limited trading, i recommend to add sl into every order this will make you better and will make you able to earn otherwise we can lose just here

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  6. #3265
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    For sure, I can trade without using any stoploss, but is that the best thing to be done, we can look around and see that there are a lot more cases of margin call in trader account, we can see that the margin call is been caused by the fact that there was a poor use of money and risk management, so therefore, that means that most of them don't make use of stoploss.

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  7. #3266
    Trader sniper007's Avatar
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    The possible thing that will happen to a trader who don't make use of the stoploss in trading is that they could loss their money and blow off their trading account if their analysis should be bad, so we need to always keep in mind that we can't be good all the time with the way we trade and make analysis, therefore it is needed that we make good analysis and then apply money and risk management.

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  8. #3267
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    Stop loss will continue to be the very right way to manage loss and see that you are not really risking what you can can't afford to loose when you trade. Stop loss is a very important thing here and what we should do regarding loss is to manage our risk and see we are not trading wrongly in this business. Stop loss is of important and we should do everything it takes to minimize loss and do ensure we have the capital that will aid us to trade when it's needed.

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  9. #3268
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    Quote Originally Posted by Tonycee View Post
    Stop loss will continue to be the very right way to manage loss and see that you are not really risking what you can can't afford to loose when you trade. Stop loss is a very important thing here and what we should do regarding loss is to manage our risk and see we are not trading wrongly in this business. Stop loss is of important and we should do everything it takes to minimize loss and do ensure we have the capital that will aid us to trade when it's needed.
    I respect the use of stoploss so much, however, I don't just depend on stoploss for me to have control over my trades because I know that I needed more than that, so, therefore what other things I look at when trading is trading with the use of the right strategy, knowing that I have to validate all trades before taking it. Knowing this has made me get to understand the market much better and then my using of stoploss has been meaningful.

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  10. #3269
    Trader Sascha's Avatar
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    Quote Originally Posted by Makaveli View Post
    I respect the use of stoploss so much, however, I don't just depend on stoploss for me to have control over my trades because I know that I needed more than that, so, therefore what other things I look at when trading is trading with the use of the right strategy, knowing that I have to validate all trades before taking it. Knowing this has made me get to understand the market much better and then my using of stoploss has been meaningful.
    yes, trading with better analysis and learn to get more knowledge are different things we can do to manage our risk of loss properly after we use stop loss with our trading. we'll get better result in trading automatically once we know market better with our improved strategy. more experience always help us to justify our risk in trading and help us to get additional advantage of knowing market better.

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  11. #3270
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    Quote Originally Posted by Tonycee View Post
    Stop loss will continue to be the very right way to manage loss and see that you are not really risking what you can can't afford to loose when you trade. Stop loss is a very important thing here and what we should do regarding loss is to manage our risk and see we are not trading wrongly in this business. Stop loss is of important and we should do everything it takes to minimize loss and do ensure we have the capital that will aid us to trade when it's needed.
    The stop loss is so good, it is what i know that will make my trading account to work rightly on protection for me. The traders without the stop loss are only exposing their trading account in full to total loss of that trading account, this is never a good idea. The good part of trading is for traders to trade with stop loss and likewise use the stop loss to plan the best possible risk to reward ratio in which the risk of the trader would be well managed.

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