For People Who Don’t Believe In
Stop Losses or Take Profit Stops
I think placing no stop losses or take profit stops stems from an ego problem. I know this because I once did it too. I tried to concern myself more about being right rather than just making money.
It’s also the lazy way to trade forex as it gives up accountability and responsibility of the trade. I used to blame an “unknown” outside force, or obtain the opinion of “expert” who agreed with the direction I took allowing me to hold on for that little bit longer. I used to HATE using stop losses or take profit stops whenever I would get stopped out and then see the position reverse and continue in the same direction I was facing.
But it came down to my lack of properly testing a forex system and finding out where the best place was to have my stop losses and take profit stops for my forex system. Some trading systems preferred a simple trailing stop of ‘X’ amount of pips, others preferred a Parabolic SAR stop, and still others preferred a combination of technical and trailing (etc etc).
You're not going to be perfect. You will have times where you are pipped out and the currency runs 100-odd pips in your original direction, and other times where you are saved from a 100-pip fall, but for the times when you are stopped out and the currency went on to make 100-odd pips in your original direction - who is to say that you cannot get back in? There’s no universal commandment that states “Thou shalt not re-enter into a position once thou hast been stoppest out”?!?! That’s a crazy idea! But you need to test the idea of re-entering (or maybe widen your stop losses and take profit stops) to make sure the approach is profitable.
Not using stop losses and take profit stops has your capital tied up into a LOSING position(s) where it could be making money elsewhere (i.e. opportunity cost). Who wants to throw good money after bad?
So, for those of you are disillusioned with stop losses and take profit stops here are some ideas:
 1. Make sure your edge is tested and properly defined. If you have programming experience use it by testing your edge on software and reliable historical forex data (I personally recommend Meta Trader's Platforms).
If you have NO programming experience then there is no excuse for you to NOT paper trade your ideas.
2. Take responsibility for your actions - you are responsible for your losses, and you are also responsible for your success - don’t put your head in the sand when the position moves against you, or when your system experiences a drawdown. Stay strong, if your edge is sound the next win could be the very next trade;
3. If you have trouble on the correct placement of stop losses and take profit stops, place them at points where you know the direction that you have chosen will no longer mean to you that the currency is moving in your desired direction. I personally prefer technical based stops on the time frame that I use (such as previous peaks and troughs plus or minus 5-10 pips - as the peak/trough would need to be broken). |
