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Do you believe tight stop-losses cause losses in the long run?

  • #61
  • Sep 9, 2015 10:10am Sep 9, 2015 10:10am
Quoting Atokys
'Tight' and 'Wide' are relative terms.

They are, of course; but even so I think that "too tight" and "too wide" are pretty easily definable, aren't they? "Too tight" means a SL used for a trade, or set of trades, or a system, which would produce either more profit or less loss if it had been wider, and "too wide" means the converse? That seems pretty much objective and whether or not it's true in any specific instance is independently verifiable.
  • #62
  • Sep 9, 2015 8:23pm Sep 9, 2015 8:23pm
Quoting Xela
{quote} They are, of course; but even so I think that "too tight" and "too wide" are pretty easily definable, aren't they? "Too tight" means a SL used for a trade, or set of trades, or a system, which would produce either more profit or less loss if it had been wider, and "too wide" means the converse? That seems pretty much objective and whether or not it's true in any specific instance is independently verifiable.
I would assume the breaking point would be some extreme value like a 10 pip SL for a system that follows the weekly trend. Apart from obvious extremes, adjusting the tightness or wideness of a stoploss often results in a trade-off:
- Tighter stoplosses result in more false negatives but have the potential to produce winners that give a large return on initial risk
- Wider stoplosses ensure exposure to profitable moves but also produce a lower return on initial risk

Depending on the system and the market, either setting may test out to be more profitable or they may test out to be the same. Ultimately, the decision to use a tight or wide stop depends entirely on how you wish to have your equity volatility served to you.
  • #63
  • Sep 9, 2015 8:41pm Sep 9, 2015 8:41pm
Quoting Atokys
{quote} I would assume the breaking point would be some extreme value like a 10 pip SL for a system that follows the weekly trend. Apart from obvious extremes, adjusting the tightness or wideness of a stoploss often results in a trade-off: - Tighter stoplosses result in more false negatives but have the potential to produce winners that give a large return on initial risk - Wider stoplosses ensure exposure to profitable moves but also produce a lower return on initial risk Depending on the system and the market, either setting may test out to be...
Nice posts Xela and Atokys.

With medium to long term trend trading with fixed fractional position sizing using volatility there is certainly a delicate balance between the two.
  • #64
  • Sep 9, 2015 8:55pm Sep 9, 2015 8:55pm
Thanks
Quoting Copernicus
fixed fractional position sizing
Ah, so thats the term I was looking for.
  • #65
  • Sep 9, 2015 9:05pm Sep 9, 2015 9:05pm
Quoting Atokys
Thanks {quote} Ah, so thats the term I was looking for.
I knew it was on the tip of your tongue :-)

Ralph Vince uses a variety of this technique referred to as the Optimal F which is worth also looking into if you are interested but it needs a bit of backtest results to calculate.
  • #66
  • Edited 11:54am Sep 9, 2016 11:44am | Edited 11:54am
I'm relatively new to this game, but have been working tremendously hard in researching strategies to nail down a resilient approach to trading.

I'm reading these comments with the utmost interest because many of the trading opportunities that I have traded on have revolved around the use of support and resistance levels. My issue is that it seems very difficult to target a 2:1 RR when the stop loss needs to be at a safe distance behind a resistance/support level, out of reach of a pin spike or a stop loss probe which would otherwise ruin a perfectly good trade. Surely, that distance can be padded out by a small hedge trade? In other words, you are using your hedge trade stop loss as a proxy to mediate the extra distance for the primary trade stop loss, masking it from stop loss runs and erratic pin spikes.

So, my example would be that you can go 60+ pips above with your primary trade's stop loss, which may be necessary in a volatile market. Hedge trade 30 pips above primary trade price (where under normal circumstances you would set your loss at or close to) with a take profit at 40+ or so pips(if desired, but could do a soft take profit). Hedge stop loss at break even. Any hedge gains should absorb the stop loss range maintaining the 2:1 RR ratio. Should the Hedge stop out at break even, then your intended trade is preserved, at which point you may want to adjust the setup again. I know it sounds kind of convoluted, but could possibly work well as a EA trade assistant to automate the process.

The nice thing about this is, given a High Probability trade and the added insulation, you could possibly trade with a slightly bigger lot, if the parameters were to be more elegantly refined for its given purpose.

I'm going to coin a new term - proxy stop loss.

What are your views on doing this?
  • #67
  • Sep 9, 2016 5:44pm Sep 9, 2016 5:44pm
Each trading plan must start with defining the exact point where you are going to put your stops (to give up). And only then you should consider where you're willing to take actual position and how far it might be from your predefined stops level.
  • #68
  • Sep 20, 2016 2:39pm Sep 20, 2016 2:39pm
Quoting Special One
{quote} Spread will eat us. ------------------------------ Let's say we trade with TP 10 pips and SL 2 pips and our spread is 2 pips. Assume that our trading system have no positive edge nor negative edge. The end result is pip win = pip loss, so PF = 1. No spread calculation: With profit factor = 1, we will get 1 profit trade and 5 loss trades. Profit: 1 * 10 = 10 Loss: 5 * -2 = -10 PF = Profit / Loss = 10/10 = 1 Now, we use spread = 2 pips: When we open a position with 2 pip spread, we will start with -2 pips. We close profit when price move 10...
Special One can you aAnalyze more topics like this one? This is the most rational explanation of the stop loss usage so far since I joined this forum. It shows that Forex trading is not just about guessing and risk taking. You have illustrated the fact that it is not just about throwing in SL any number of pips away from TP without taking factors like spread into account. This would account for the controversy over the the usefulness of SL, since most people use it wrongly.

I personally use just enough pips to limit my risk to 1% loss and 3% profit without consideration for effect of spread. Then I hate it when my trades close prematurely, or my TP never triggers before rtracement. To avoid all that frustration, I refuse to use SL. Rather rely on total alignment between m1, h1, D1, W1, and M1 charts. for deciding on long and short term market directions.

Once I get all the major periods pointing in one direction with SMA-7, I find no use for SL. Only when the SMA-7 switches from support to resisistance following a sharp cross over, do I change direction by buying or selling double the volume of a particular position.
Mecrandie
  • #69
  • Sep 20, 2016 3:50pm Sep 20, 2016 3:50pm
If you are able to get on the early train when the momentum is strong enough to the next station before rush hour and all the problems and the unkown variables kick in ,your stops can be as tight as a 1000 virgins and will remain intact.but not many seem to look for the early train or a station located directly enroute,

if you cannot locate the momentum which is iniment then tight stops are out of the question.
  • #70
  • Sep 21, 2016 1:28am Sep 21, 2016 1:28am
My opinion is that the stop-loss should be set in the place where there is no hope that the price will come back and still make a profit. This place can be a level of Fibonacci or Gann.
At the same time, if you use traling stop, then in that case, I use a tight stop loss, as close as possible to the price.
Surrealist
  • #71
  • Sep 21, 2016 3:54am Sep 21, 2016 3:54am
Quoting SalvatoreD
My opinion is that the stop-loss should be set in the place where there is no hope that the price will come back and still make a profit. This place can be a level of Fibonacci or Gann. At the same time, if you use trailing stop, then in that case, I use a tight stop loss, as close as possible to the price.
WHERE TO SET THE STOP LOSS
Inspect the H1, H4, H8, D1, W1 and M1 periods of the chart for any particular Forex pair to see at what price level a clear reversal in the direction or a pivot of SMA-7 occurs. This is where to place the stop loss if you are day-trading. At this point it allows the position to complete its full down or up trend without closing it prematurely.

But if you are swing-trading, you order an opposite trade with double the volume of the position of interest at this point. Thus the trade makes a U-turn at the pivot point instead of exiting the market, thereby avoiding the delay and cost of market re-entry.
Mecrandie
  • #72
  • Edited 5:34pm Sep 25, 2016 10:22am | Edited 5:34pm
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{quote} WHERE TO SET THE STOP LOSS Inspect the H1, H4, H8, D1, W1 and M1 periods of the chart for any particular Forex pair to see at what price level a clear reversal in the direction or a pivot of SMA-7 occurs. This is where to place the stop loss if you are day-trading. At this point it allows the position to complete its full down or up trend without closing it prematurely. But if you are swing-trading, you order an opposite trade with double the volume of the position of interest at this point. Thus the trade makes a U-turn at the pivot point...[/quote]

See live hourly SMA-7 charts below.

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Mecrandie
  • #73
  • Sep 25, 2016 11:09am Sep 25, 2016 11:09am
Quoting mecrandie
{quote} See chart links below. CADJPY - https://www.tradingview.com/x/lP7nL9GN EURJPY - https://www.tradingview.com/x/DIPl2OH2 EURUSD - https://www.tradingview.com/x/Yf2bBqnY
i use tight stop losses...
  • #74
  • Edited 11:20pm Sep 25, 2016 10:58pm | Edited 11:20pm
Quoting Don96
{quote} i use tight stop losses...
Tight or loose depends on whether you are scalping of swinging. The important thing is that you close out or reverse a trade in your favor just before it goes against you.
Mecrandie
  • #75
  • Sep 26, 2016 12:36am Sep 26, 2016 12:36am
Quoting mecrandie
{quote} Tight or loose depends on whether you are scalping of swinging. The important thing is that you close out or reverse a trade in your favor just before it goes against you.
i swing... use 6-10pip stops most of the time
  • #76
  • Sep 26, 2016 4:27am Sep 26, 2016 4:27am
Quoting Don96
{quote} i swing... use 6-10 pip stops most of the time
There are no absolutes in terms of number of pips. Take a look at post 72 above and note how I place my trade reversal orders. I do my best to avoid premature triggers and delayed closures. If you are too tight, wild price spikes or contractions will trigger your SL order and return to baseline forcing you to quit a good position or trade in the wrong direction. The ability to figure out where a particular Forex pair might make a definite u-turn comes with experience. It is at this particular pivot point that you want to close a trade or reverse the trade direction.
Mecrandie
  • #77
  • Last Post: Edited 12:11pm Oct 4, 2016 11:14am | Edited 12:11pm
Quoting mecrandie
{quote} There are no absolutes in terms of number of pips. Take a look at post 72 above and note how I place my trade reversal orders. I do my best to avoid premature triggers and delayed closures. If you are too tight, wild price spikes or contractions will trigger your SL order and return to baseline forcing you to quit a good position or trade in the wrong direction. The ability to figure out where a particular Forex pair might make a definite u-turn comes with experience. It is at this particular pivot point that you want to close a trade or...
LOOSE FIXED TRAILING STOP LOSS VS TIGHT STOP LOSS

This is how I use fixed SL with TP +/- 0.00300 (or 0.30 for JPY and 200 pips trailing. No frequent premature closing of positions. I synch weekly SMA-7, BB-14, and EWO-7-35 and trade 0.1 lot units in whichever direction they point. The fixed 200 pips trailing SL follows 200 pips behind Mkt price and locks in all extra pips gained above 200 pips. See chart below

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Mecrandie
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