Is anyone successful using a large stop loss?

I have been going back and forth on how to use my stop loss. I've been considering the method of renowned trader Paul Tudor Jones (in the book "Market Wizards") in which he basically does a series of probes - entering the market (at areas his analysis tells him the market is about to turn around) and then exiting quickly for a small loss - and then re-entering again ... once again using a small SL. He keeps doing this (entering and exiting quickly) until the market takes off in his expected direction for a big win. Here below is a snippet of the interview conducted by the author of the Market Wizards book. It briefly explains how Jones trades:

Q: My impression is that you often implement positions near market turns. Sometimes your precision has been uncanny. What is it about your decision-making process that allows you to get in so close to the turns?
Jones: I have very strong views of the long-run direction of all markets. I also have a very short-term horizon for pain. As a result, frequently, I may try repeated trades from the long side over a period of weeks in a market which continues to move lower.
Q: Is it a matter of doing a series of probes until you finally hit it?
A: Exactly. I consider myself a premier market opportunist. That means I develop an idea on the market and pursue it from a very-low-risk standpoint until I have repeatedly been proven wrong, or until I change my viewpoint.
Q: In other words, it makes a better story to say, Paul Jones buys the T-bond market 2 ticks from the low, rather than, On his fifth try, Paul Jones buys the T-bond market 2 ticks from its low.
A: I think that is certainly part of it. The other part of is that I have always been a swing trader, meaning that I believe the very best money is to be made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all the money by catching the trends in the middle, but I have caught a lot of bottoms and tops. If you are a trend follower trying to catch the profits in the middle of a move, you have to use very wide stops. I'm not comfortable doing that. Also, markets trend only about 15 percent of the time; the rest of the time they move sideways.

The above Paul Tudor Jones method of exiting quickly with a small loss if your trade isn't working out and then later entering again by continuing to use a small stop loss, is something that sounds appealing to me. However, there is a downside to using small stop losses. As a FF member named "Mike Haran" wrote (in an old thread I found) : "Small stops are death by a thousand cuts".

Thus, if small stops are "death by a thousand cuts", then would it be a better idea to do the opposite and have extra-large stops? I've seen traders say a trade needs a lot of room to allow the market to move. The upside is that it will give your trade room to breathe and you will have a higher percentage of wins. Of course, the downside to this is just a few losses can put you fairly deep in the hole (depending on how large your SL is each time).

By the way, my definition of a "large" stop loss is less than 1:1 risk/reward ratio - Especially a ratio such as 100 pip SL & 50 pip target, or 50 pip SL & 25 pip target, etc.

What I'd like to know is:

1. What do you guys think is the best way to trade? Small SL's or large SL's?

2. Is anyone here successful using less than 1:1 ratio? Or do you know of anyone that is successful doing so?

I'm really interested to see the responses to either (or both) of these 2 questions.

Hi mate,

I myself haved used an "inverted" risk to reward ratio many times to give the market breathing space if i'm scalping. I trade the 4H charts so if I'm scalping my risk to reward ratio sometimes will be be a 100 pip stop loss to 50 pip profit.
Although most people will disagree on using this method it has worked well for me (and for many professional traders like Peter Armstrong from Forex Nation).
The only thing is when you do get that rare losing trade it'll kick your ass.

Nowadays I'm practising to at least have a 1:1 or 1:2 risk reward but I am still guilty of taking profits early before it hits my take profit.

It all comes down to discipline though.

The best thing to do is trade 4H charts and above, check back every 4 hours if you're in profit and if you are in profit by 20-30 pips move your stop loss to break even and let it run. If you get stopped out you haven't lost anything (just time).

Here's a good video by Timon Weller

Dimi.A,

Thanks for posting that video (as well as posting your thoughts about risk / reward). I have a Word document of various trading info and I'm going to paste the link to the YouTube video into my document. It is good info. Thanks again.

You're welcome bro. Good luck

I am not so successfully as how I want to be.
My trading style is very common with: http://www.forexfactory.com/mramazing. The same pro and the same cons

I found sometimes I am 100% sure it will go in direction1 and I use high leverage ( relative high). And usually it goes 5-30 pips there and I see some weakness in 1M and I take profit ( to bad), but I am happy with +30 pip, which can be +5 or +10% of my account. 10:1 to 30:1 leverage.
Sometimes I see it goes against me.
Now here is the question what to do.
Also it depends how it goes against me.
Like Paul Tudor I will exit time based too, because it becomes to risky/gamble the next direction
Sometimes I see it is just a minor spike and I let a floating draw dawn of -20% and I am not worried usually it comes back and I search even better opportunities to re enter and I will add to my lossing positing and usually I get a nice profit.
But the big numbers are working too: usually I am right, but not always. From 200 trades or even more it will be 1 case when I am wrong and I add to my positions and I am still wrong and I will choose a margin call or such like that or just close the position with wet eyes and see how it fly my 2-5 week profit from trading.
It isn't so bad mathematically and account growing, but the psychology kills me.
Many times I see http://www.forexfactory.com/ken*a using a 10 pip SL on EUR/USD or U/J. Which is very small.
It can be used if you see a heavy movement. Mostly in counter trends, low timeframes. If you use on trending, higher timeframe and not allowing for the price to come back to a fibo level you can be profitable, but maybe you have a 20%-30% win ratio and you have to deal with that psycho.

http://www.forexfactory.com/forexcube he had an interesing setup:
-before news open in both direction and put a SL to each one:Lets say the price will go up 100 pip. The Long will survive, the Short is stopped with 10 pip SL, so you payed 10 pip + 2x spread. But there is a case, when it goes up and then down: you will lose in both positions.

Forgot the name, but it was a trader or an institutional trader, who traded like this: 10 pip TP and 90 pip SL. I don't know how much risk it was at his 90 pip and how he handle it. Maybe just 1% or 4%, who knows.

Personally I have found the good system: It must match your personality and your lifestyle. Otherwise it is a frustration, you will not like trading and get even more frustrated on loss and you will quit, because of the stupid system. And is not about the entry/exit, TP/SL. The money you will make and you will lose anyhow. Any random, blind system has some points, where can money made. If you use low leverage, then very close to be at BE a random system! Think about if the spread+commission =0, then a coin toss system is at BE. Almost everyone has a better system than that one, but the high leverage it makes unprofitable.

So ask from yourself: I want to scalp the 1M , 5M chart or just si back and watch it in each 4h or is enough for me to watch 1x /day. Want to deal often with small loss or want to deal rare with huge loss?

Time effort x capital = return.
So if you want the same return/month. Be 10% for example. Or you put more time in trade and go to lower timeframe and work 8-12h/ day or 1h, but then more capital.

This are my experiences, thoughts.

I think that is successfully, who enjoy the trading and can be in the game, even he is loosing money in longer term! He will be profitable sooner or later.
Who just make money and do not enjoy it is profitable, but not successfully. He will quit sooner or later, a carrier change or start taking drugs or sinucide (like Livermore and many others).

Difference here is that Tudor Jones is testing the market with sizeable trades probing for a weak spot . This wont work for you .

What you should do is run your losses and cut your profits.. This is adverse to what FX educators teach you ( thats why they are failed traders)

The majority of the time the market ranges,so you will be safe on this strategy.
When it trends then thats a problem if you are on the wrong side however trends are usually easy to spot once instigated.

It then becomes how stubborn you want to play if caught on the wrong side of the trend.
Experience and learning the hardway tells you to cut it and live to fight another day

Good luck

Let me ask you, why do you enter a trade?

Response: I enter a trade because I believe that price is going to continue or reverse at that point. I assume we can agree with that because I do not see why else anyone would enter a trade.

Continuing the Thought..

The chances of getting this exact level are slim, so now we must give the trade some room to breathe. Ask yourself, how far can I let the trade go before I am wrong? Now the level that comes to mind, is the level that you set your stop at.