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Taking Profit > Stop Loss. Why?

  • #1
  • First Post: May 30, 2007 2:23pm May 30, 2007 2:23pm
I read this almost everywhere. But I read no explanation why so many guru convinced that this is the only way to go in forex.
I can just give my guess, Forex very unpredictable and trader did not expected to figure out direction of the move, so in this case 50/50 (minus spread of course) then if you TP more then SL then you probably will be positive.
I can not find any other sensable explanation. Is anyone actually know the answer why recomended TP>SL ?
"Every battle is won before it is ever fought." - Sun-tzu, The Art of War.
  • #2
  • May 30, 2007 3:07pm May 30, 2007 3:07pm
Simply because you R/R ratio will be better. If TP > SL, R/R Ratio > 1.

Why is better to enter trades with high R/R ratio? Think about this, just an example: if your SL is twice your TP, you would need to winning positions to overcome only a losing one.
  • #3
  • May 30, 2007 3:34pm May 30, 2007 3:34pm
But, who can be sure the TP will be reached when you win? TP>SL is an arbitrary rule.

Sometimes, considering the situation (Resistance and support, trendlines, indicators readings, fibos, fundamental news, etc) could be convenient a 50/50 relationship or even TP>SL.

If you apply the rule TP>SL in a mechanical way, you can be damaging your own probability of being successfull in a trade.

This requires a lot of elaboration and is a very important part of your trading plan.
  • #4
  • May 30, 2007 3:39pm May 30, 2007 3:39pm
Because if you have a strategy that is 50% win rate, but you lose more pips when you lose than you make when you win, you will blow up your account. That's why.
Mr. Trend
  • #5
  • May 30, 2007 4:21pm May 30, 2007 4:21pm
can we have tp> sl and still having 50/50 winning ratio?
i think it is useless if we put tp = 3x sl and with winning ratio 1 : 3

if martingale is implemented in pure manner, maybe it will gives all win and only 1 loss, 1 loss to bancruptcy...
  • #6
  • May 30, 2007 4:22pm May 30, 2007 4:22pm
Quoting Punto33
But, who can be sure the TP will be reached when you win? TP>SL is an arbitrary rule.

Sometimes, considering the situation (Resistance and support, trendlines, indicators readings, fibos, fundamental news, etc) could be convenient a 50/50 relationship or even TP>SL.

If you apply the rule TP>SL in a mechanical way, you can be damaging your own probability of being successfull in a trade.

This requires a lot of elaboration and is a very important part of your trading plan.
Yep... that's the answer. If you have a plan to make X pips on profit and lose Y pips on a stop, you're nothing but a scalper... it doesn't matter if the chart's time frame you work with is 1 minute, 1 hour, 1 day or 1 week. Entry signals determine what your initial risk is. Because risk increases and chance for profit dwindles the further you go forth in time, exit signals determine how much you make or lose, and are an often ignored factor on how often you win or lose. Going with nothing but a TP & SL as your "exit signal" is being a lazy trader.
  • #7
  • May 30, 2007 9:37pm May 30, 2007 9:37pm
I don't think there are any hard and fast rules that are always right. Find a system that works for you. For example, if you had a system whos SL was 3 times bigger that the TP, but you got it right 80% of the time consistently, that is a winning system! The idea is to win more than you loose, period. If you can find a way to do that, do it.
  • #8
  • May 31, 2007 12:25am May 31, 2007 12:25am
I usually don't have a TP, often I put a SL with 2% risk and then move it to BE when the trade moves X amount of pips in the correct direction. And then follow the trend and use a trailing stop. This works great for me...
  • #9
  • May 31, 2007 1:53am May 31, 2007 1:53am
i have come to a sys which i will not let it down for some time....check weekly chrt (for stocks), draw fibo high/low, enter after bottom creates at 23 fibo, tp 61.8 fibo, mental sl at 0 fibo...Lock profit after 50 fibo broken a little below 31 fibo....hope that helps.
its just money
  • #10
  • Edited 2:22am May 31, 2007 2:21am | Edited 2:22am
Quoting bluebuddha
Yep... that's the answer. If you have a plan to make X pips on profit and lose Y pips on a stop, you're nothing but a scalper... it doesn't matter if the chart's time frame you work with is 1 minute, 1 hour, 1 day or 1 week. Entry signals determine what your initial risk is. Because risk increases and chance for profit dwindles the further you go forth in time, exit signals determine how much you make or lose, and are an often ignored factor on how often you win or lose. Going with nothing but a TP & SL as your "exit signal" is being a lazy trader.
Hey Blue,

What is wrong with being a scalper....?? or am I reading you incorrectly?
1million x 5 pips @ $100/pip = $500/trade x 5 days = $xx in profits.
Not bad for being in a trade for a minimal amount of time....FX can change quickly, and time should also be considered in traders risk management. Which I see you agree with as stated.
Proper Prior Planning Prevents Piss Poor Performance
  • #11
  • May 31, 2007 5:50am May 31, 2007 5:50am
Quoting FxJarhead
Hey Blue,

What is wrong with being a scalper....?? or am I reading you incorrectly?
1million x 5 pips @ $100/pip = $500/trade x 5 days = $xx in profits.
Not bad for being in a trade for a minimal amount of time....FX can change quickly, and time should also be considered in traders risk management. Which I see you agree with as stated.
With 20/20 hindsight, I was being a little harsh there. I think the point I was trying to make is time needs to be a factor in your trading decisions, as risk increases with time (think about it: you might be able to have an indicator that can predict fairly well what the next one or two price bars will do, but how easy is it to predict what will happen 100 or 200 bars from now? This is why options carry a "time value", to compensate for this risk).

Getting out of a trade early is a better idea than "fire and forget", and wait to see what happens tomorrow. I'm not saying that you should continuously baby-sit your trades... heck that causes extra stress, and most newbies get twitchy and exit their trades if it goes two ticks against them. It's just that if you did choose the correct direction that the market was heading, usually it should be obvious within a few bars from your trade. If the market seems to be going sideways or drifting slightly in the wrong direction, it is best to get out instead of waiting for the ball to drop into the roulette wheel to see if your number has come up.
  • #12
  • Jun 1, 2007 10:06am Jun 1, 2007 10:06am
The more times you trade (i.e. scalp) the more times you can be wrong. Yeah I know that is being pessimistic. The proper mindset is to think about what can go wrong before counting all the millions they will make.

Thats is why most refer to risk/reward not reward/risk.
  • #13
  • Jun 1, 2007 10:10am Jun 1, 2007 10:10am
Profit Taking > Stop Loss. Why?

Why not?
Man who scratches ass should not bite fingernails
  • #14
  • Jun 1, 2007 2:00pm Jun 1, 2007 2:00pm
I am trying to be good scalper, and so far I don't see how it can be true for scalping. Also in predictable games(not Forex) it is totally not nessessesery. Yet in Forex, so many teachers keep saying that it is the only way. If they right then Forex is totally unpredictable. Or majority trades symply not smart enough to figure out the direction of currency.

Quoting Leugimp
Profit Taking > Stop Loss. Why?

Why not?
"Every battle is won before it is ever fought." - Sun-tzu, The Art of War.
  • #15
  • Jun 1, 2007 10:45pm Jun 1, 2007 10:45pm
Quoting grillbritt
I usually don't have a TP, often I put a SL with 2% risk and then move it to BE when the trade moves X amount of pips in the correct direction. And then follow the trend and use a trailing stop. This works great for me...
Exact same here.
  • #16
  • Jun 2, 2007 12:45am Jun 2, 2007 12:45am
Quoting SunTrader
The more times you trade (i.e. scalp) the more times you can be wrong. Yeah I know that is being pessimistic. The proper mindset is to think about what can go wrong before counting all the millions they will make.

Thats is why most refer to risk/reward not reward/risk.

Hi Sun,

I have to respectfully disagree with you on this thought. Though I do agree with considering what can go wrong, as long as it does not paralyze a trader. Firstly, a trader does not have to trade many times with scalping....though many do, as I do also. I may take 10-15 trades per day ( roughly 8 hours ) seeking 5-10 pips net. Please understand, I do not use MM's with 3-5 pip spread on Majors either, and I trade multiple contracts ( 5-10 ) and multiple pairs. Secondly, a trader that limits the number of trades can be "correct" in the long run, yet have an unforseen event move the market against the position and hit the stop loss, only to reverse and move in the positions original direction. This even happens when scalping too!!! Time truly is an enemy...as the market is very fickle. The less time my position is open, the better IMHO.
Lastly, it really does not require a fancy system, pages of rules, or an EA. Nor news trading. Price movement and a few simple indicators, S/R, and pivots ( fibs are nice also )....look at any chart, and one can see that price moves and back fills many times. The eur/usd was a perfect example of this point this past week. The gpd/jpy is great for this also ( I seek 15 pips net here ) I do not adhere to the total # of pips rule, I adhere to the $$profit rule. ( and of course..... LOW Leverage! ) Do I miss the BIG moves....YEP....though I'm in cash at closing time, and can scalp a net 50pips per day. Also note....I do not trade for the sake of trading either. One last thought here, not to sound hipocritical....I do place longer trades, with fewer lots, and NO stops. Demo it and try.....
Proper Prior Planning Prevents Piss Poor Performance
  • #17
  • Jun 2, 2007 1:07am Jun 2, 2007 1:07am
Quoting FxJarhead
I do place longer trades, with fewer lots, and NO stops. Demo it and try.....
It won't suit everyone but it's the way I trade. The key is % risk management, even on multiple positions, in multiple pairs.
As long as the trade is with the trend (long term), and you don't focus on the negative positions that can build at times, as one of the senior players on here said..'the trend will get you out of trouble'.
  • #18
  • Edited 4:11pm Jun 2, 2007 5:17am | Edited 4:11pm
Great thread
I am trying to understand the rational behind "No Stops". Not saying it's wrong just trying to understand the logic.
Do folks really mean " No Stops". I think an argument could be made that the GBP/JPY is trading now at the top of a 11,000 pip range. If I am incorrect I think we can all agree that at some point it will start a down trend?
For that matter maybe we can all agree that every pair is either at the top, bottom or someplace in between a very large range?
Would it be a No Stop enthusiasts intention if caught in the wrong direction to ride this thing for 11,000 pips. I may be a light weight but, common.
I ment lite.
  • #19
  • Jun 2, 2007 6:28am Jun 2, 2007 6:28am
Quoting bapxyz
Great thread
I am trying to understand the rational behind "No Stops". Not saying it's wrong just trying to understand the logic.
Do folks really mean " No Stops". I think an argument could be made that the GBP/JPY is trading now at the top of a 11,000 pip range. If I am incorrect I think we can all agree that at some point it will start a down trend?
For that matter maybe we can all agree that every pair is either at the top, bottom or someplace in between a very large range?
Would it be a No Stop enthusiasts intention if caught in the wrong direction to ride this thing for 11,000 pips. I may be a light weight but, common.
The way I look at the "no stops" idea is this: most traders make the mistake of using a stop loss order (trailing or otherwise) as their only exit signal. Then they complain about stop hunters taking them out of the market at a loss, only to have the market go back in their direction.

You can have a stop, but who says you need to place it as an order with the broker? There should be a "mental stop", or an exit signal determined by your indicators and/or S/R levels. This is the point where if you happen to see the price trigger the exit signal or go past the S/R, you dump the trade with a market order, no matter what. And the price where this occurs should happen before the stop loss order you place with your broker is hit.

The purpose of stop loss orders is not an exit signal: their purpose is to prevent something disastrous, such as a runaway market in the wrong direction, or when you're not watching the market. If you have an exit price/signal about X pips away from your entry, put your stop order about 1.5X to 2.0X pips away.
  • #20
  • Jun 17, 2009 10:45am Jun 17, 2009 10:45am
I use a 15mins charts to trade
I use the stop loss of 35pips and the take profit is 70 pips
on the four major currency pairs
is there something wrong?
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