Breakeven Stops - Trading Emotions | Forex Factory

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Breakeven Stops - Trading Emotions

  • #1
  • First Post: Dec 20, 2007 12:46am Dec 20, 2007 12:46am
Hey guys,

We all know that allowing emotion to enter your trading strategy will kill you (well, your account at least), so why the breakeven stops? It serves no purpose but to make sure a "percieved winner" doesn't turn into an actual loser, but IMO we shouldn't view each trade as seperate, rather as one long trade, jumping in and out of the market as we get different signals.

Just a thought
  • #2
  • Dec 25, 2007 5:54am Dec 25, 2007 5:54am
Hi, here's what i think:

1. Breakeven stops should be placed in accordance with your trading strategy rules, not for the hell of it.

2. One of the most important trading goals is too preserve what you have! Breakeven stops allow you to preserve your capital.

3. Another idea is the fact that some people exit a certain % of their position when they are + certain amount ahead, then move the stop to breakeven, thus preserving their capital.
  • #3
  • Jan 2, 2008 10:59pm Jan 2, 2008 10:59pm
Quoting phil3526
Hi, here's what i think:

1. Breakeven stops should be placed in accordance with your trading strategy rules, not for the hell of it.

2. One of the most important trading goals is too preserve what you have! Breakeven stops allow you to preserve your capital.

3. Another idea is the fact that some people exit a certain % of their position when they are + certain amount ahead, then move the stop to breakeven, thus preserving their capital.

Hey phil,

Yes, the number 1 priority for a trader is capital preservation, but number 2 should be to make as much money as you can. Capital preservation is achieved by limiting your losses (or limiting position size in some of those weird 'take no losses' strategies). When you take the trade, you know how much you are willing to lose, so why should this change just because you have achieved some movement in your desired direction. The position of the exit should be changed on the merits of the chart.

Of course, there are some instances where break even stops my be valuable, for example, i you are in a long term positions in which you have decided to exit on a reversal but cannot monitor the position for a time so may miss the exit. There are many more, but these are not the break even stops I am referring too. I am talking about the break even stops that are set due to factors such as you have gone 50 pips into profit.

Your 3rd point is the same type of thing as the break even stops. Why take profits purely due to the fact that you are a certain % or number of pips into profit. Some days 20 pips may be quite difficult to obtain, other days 20 pips will be covered in just a few 1m bars. Also, some trades may have the potential to go much further than others. Each trade should be based on the merits of the chart, not some arbitrary psychological goal.

Although I write these points, I do not necessarily practice them 100% of the time. Sadly, unless you have a totally automated system, trading is as much about overcoming psychological barriers as it is about picking direction (it would be damn easy otherwise). This needs to be taken into account when devising your strategy. It is very hard to watch a profit turn into a loss, or watch a big win turn into a small win without having taken any profits, and the experience can cloud your judgment regarding the current trade and future trades. So when first starting out, these psychological protections are almost essential for extended success. But in my experience, as, over the years, I have been eliminating these psychological components such as taking profits at a certain %, my trading has been getting better for it.
  • #4
  • Jan 2, 2008 11:09pm Jan 2, 2008 11:09pm
  •  TrevA
  • | Joined Oct 2007 | Status: my brain has a mind of its own | 166 Posts
Quoting Agro
Hey guys,

We all know that allowing emotion to enter your trading strategy will kill you (well, your account at least), so why the breakeven stops? It serves no purpose but to make sure a "percieved winner" doesn't turn into an actual loser, but IMO we shouldn't view each trade as seperate, rather as one long trade, jumping in and out of the market as we get different signals.

Just a thought
For me, break even stops have a psychological benefit and nothing more.

I resent having a position up 100 points reverse to a loss... for that reason, and because I know more opportunities will present themselves I choose to exit with minimal profit or break-even. Of course I prefer to take the 100 pip profit but sometimes the market reverses so quickly (GBPJPY) that my only alternative is to exit break-even.

When I enter a trade, I choose to risk a % of my equity but once it becomes profit I hate the loss.

I now scale my trades. I open positions with 5 trades of equal size.... if the position moves against me I scale out.

TrevA
  • #5
  • Jan 2, 2008 11:26pm Jan 2, 2008 11:26pm
Hey Trev

Yes. This is exactly what I am saying. You obviously have enough of an edge in raw direction prediction (and most successful traders will) to allow you to incorporate this psychological component into your strategy. As a winner turning into a loss bugs you so much, your trading results are probably improved by this approach. But what if it didn't make the slightest bit of difference whether you won or lost on any one trade. Do you think your trading would benefit from removing the BE stop and only exiting when you are signaled to exit?

I don't know. Maybe your strategy wouldn't benefit, each strategy is different. But I know mine has as I have tried to remove these type of things.

Cheers
  • #6
  • Jan 2, 2008 11:46pm Jan 2, 2008 11:46pm
I used to think there was a problem with the breakeven stop, but now I look at it another way.

If you get stopped out at breakeven, what prevents you from re-entering the trade (likely in a better position) if the chart conditions tell you that your diagnosis was indeed correct, but your timing was off?

My only problem with it is why settle for breakeven? I'll always take a few pips away from the trade just to keep the account moving in the right direction. If you can book enough profit to cover the spread for re-entry, then you were basically given a "free" repositioning of your trade which should increase the probability for profits.
  • #7
  • Jan 3, 2008 12:06am Jan 3, 2008 12:06am
I like the comfort of being in a risk free trade with a stop at even. The problem I have experienced so often was getting stopped at break even only to see a good trade pass me by. Price can linger around for a bit until it makes up its mind. I found scaling out once profit matches my stop size eliminates risk and still allows for some volatility.
  • #8
  • Jan 3, 2008 12:08am Jan 3, 2008 12:08am
Quoting youalreadykn
I used to think there was a problem with the breakeven stop, but now I look at it another way.

If you get stopped out at breakeven, what prevents you from re-entering the trade (likely in a better position) if the chart conditions tell you that your diagnosis was indeed correct, but your timing was off?

My only problem with it is why settle for breakeven? I'll always take a few pips away from the trade just to keep the account moving in the right direction. If you can book enough profit to cover the spread for re-entry, then you were basically given a "free" repositioning of your trade which should increase the probability for profits.
Yes, you are right, you can always re-enter. But it doesn't always work like this. If your entry is around a strong S/R point for example, then stop sweeps in these areas are often sharp spikes that stop you out, then retrace without giving you a chance to get back on.

Of course, the longer your time frame, the more likely you are to be able to get back in.
  • #9
  • Jan 3, 2008 12:15am Jan 3, 2008 12:15am
Quoting ssherwood76
I like the comfort of being in a risk free trade with a stop at even. The problem I have experienced so often was getting stopped at break even only to see a good trade pass me by. Price can linger around for a bit until it makes up its mind. I found scaling out once profit matches my stop size eliminates risk and still allows for some volatility.
This is what I used to do a lot. Thought it was a better alternative to BE stop. Not so sure though, definately limited to much of my profits for my strategy as my (pips to stop) : (pips to highest scale out point) ratio is generally quite high. Depends on your strategy though I guess as to which method will be most effective.
  • #10
  • Jan 3, 2008 10:58am Jan 3, 2008 10:58am
Quoting Agro
Yes, you are right, you can always re-enter. But it doesn't always work like this. If your entry is around a strong S/R point for example, then stop sweeps in these areas are often sharp spikes that stop you out, then retrace without giving you a chance to get back on.

Of course, the longer your time frame, the more likely you are to be able to get back in.
Agree 100%, but the main problem with that trade would have been entering around a strong S/R point which should have been diagnosed before trade entry. That would have been a bad trade entry point and thus exiting at break-even would be a blessing. You would want to see the S/R breached on the retrace to confirm that you should re-enter.

All of this matters far less when scalping on 5sec-5min charts, so the time frame does matter as you said.
  • #11
  • Jan 3, 2008 12:23pm Jan 3, 2008 12:23pm
  •  TrevA
  • | Joined Oct 2007 | Status: my brain has a mind of its own | 166 Posts
Quoting Agro
Hey Trev

But what if it didn't make the slightest bit of difference whether you won or lost on any one trade. Do you think your trading would benefit from removing the BE stop and only exiting when you are signaled to exit?

I don't know. Maybe your strategy wouldn't benefit, each strategy is different. But I know mine has as I have tried to remove these type of things.

Cheers
I don't think my trading would benefit by removing the BE stop because it is one of my exit signals. It's not so much of a problem now because I'm using the % of equity mm system and I scale out of positions.

When I open a position I make 5 orders (lot size / 5)... Each order has a different exit strategy and is closed at different times. Scaling out overcomes the binary all in all out mentality and the psychological problems I have with it.

I don't know how this would work for others but it seems to be ok for me at the moment.

What do you do? What is your money management system?

Trev
  • #12
  • Jan 3, 2008 4:31pm Jan 3, 2008 4:31pm
I'm still a pretty new trader (3 months) but I agree that moving stops to BE is overrated, and I don't do it. If we are technical traders, we have an entry and stop loss in mind when we take a trade (and maybe a profit target as well). As the trade evolves we can move stops up based on whatever system we have (above/below most recent swings, trail a MA, whatever).

I don't see any real technical reason for moving stops to BE. I think it's just a fear of losing that causes people to do this, and I think moving stops to BE for no real reason is less profitable than placing them based on how the market is behaving. Yes you are going to have some trades go 30-50 pips your way and then become a loser, but many times the market will reverse to your BE point and then shoot off again.
  • #13
  • Last Post: Jan 3, 2008 4:48pm Jan 3, 2008 4:48pm
One of the Cardinal sins in trading is letting a winning position turn into a losing one. Stops should never be a certain amount as in 30 or 50 pips, or i can only afford to lose this amount. Instead they should be in a place where if taken it proves you wrong and in a place that is not obvious as in round numbers, if this means that the stop is too much to afford then the trade should not be taken.

Behind a prior swing or support/resistance level that has held is preferred, imho. But there comes a point when price moves in your direction that the stop must be moved into profit or at least break even. Eliminating or managing risk is a key to success. Everyone’s mental approach is different so there are varied thoughts to when and how to take or secure profit, move stops. But I’d say most at least move up to entry their positions after the market moves in their direction at a point.

fwiw
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