Stop loss dilemma -- to use SL or not to use SL, it's a problem

[wqking]

(I posted this on Reddit Forex forum, hope this is not a problem to repost here)

Hi, all,

My this topic is not intended to start another SL vs no-SL flame war, but I want to share you my experience and my thinking and I would like to hear your opinion.

My experience:
In the beginning I had executed SL firmly (I started trading about 15 months ago). The result was, most time after the SL was hit, the price got retrace and I would have quit with much less loss. I'm not regretting anything, but I'm saying the fact.
Recently I read some blogs that insist SL is bad. I tried no-SL then almost all my trades were profit. That's so cool. About two weeks ago, I over traded FTSE and DAX CFDs, the prices goes down immediately after I entered long, and plunged very much. The biggest float loss were more than 20% of my total balance, and more than 110% of the margin on those trades, in 2~3 days. LUCKLY, I exited those trades with about 2% profit of total balance.

My opinions on SL vs no SL:

Pros of SL:
1, Always protect us from blowing out.
2, We don't need to watch the market all the time and we can have good sleep in the night.
3, SL makes us thinking about the exit logically, such as when the entry condition is not valid any more.

Cons of SL:
1, Reduce the probability of turning a loss trade to profit. When the price hits the SL, it most likely is in over buy/sell and there is high chance that retrace will happen. So without SL, we have very high chance to exit at better or even profitable price.
This point depends on the trading style. Currently I like to trade mean reversion, then SL may be a problem. For trend following, this may be not a problem because when SL is hit, the trend should be not valid any more.

Pros of no-SL:
1, Much better win rate because the probability of turning a loss to profit is much higher than with SL.

Cons of no-SL:
1, One trade may blow out the whole account.
2, We have to watch the market closely, if not all time.
3, We must use some other mandatory exit rules when in loss, such as time based exit, to avoid cons 1 (one trade blows out the whole account).

Currently I decide to start using SL again, because I experienced so much fear on the FTSE and DAX very large draw down.

You opinions on SL and no-SL to add some pros/cons points to the list? And how your overall opinion on SL and no-SL?

Thanks

 

[dbphoenix]

Opinions don't count for much, but it's your money.

Did you test any of this?

What were your variables?

How did you control them?

What were your results?

If you have all that, the opinions of others don't matter.

If you don't have any of it, the opinions of others don't matter.

 

[loyek590]

I personally don't use stops. But I protect myself using size and spreads.

either way, it's always the same...keep your losses small and let your profits grow large

 

[loyek590]

Opinions don't count for much, but it's your money.

Did you test any of this?

What were your variables?

How did you control them?

What were your results?

If you have all that, the opinions of others don't matter.

If you don't have any of it, the opinions of others don't matter.

not all of us have the ability to backtest our current strategy anymore...maybe a few previous months in a paper account.

when I was involved in extensive backtesting, we quickly learned to be highly suspiscious of systems that tested extremely well. But that is another topic, "Backtesting."

otherwise, happy Memorial Day, and have a good time remembering all those that died for their country

I'll see ya down in the basement

 

[loyek590]

Speaking of Memorial Day, there's a lot of problems with stops. Once that stop is hit, you bought up there, and you sold down here, and that loss is now sitting in your "realized PnL" and it can never be recovered. It will be with you as a trader for the rest of your life. Just like a General who sent his men in and some never came back, and he can never get them back.

what's the alternative? Just to treat them as cost of war?

 

[onemoreshot]

I personally don't use stops. But I protect myself using size and spreads.

either way, it's always the same...keep your losses small and let your profits grow large

How do you protect massive downside losses with size?

 

[Turveyd]

How do you protect massive downside losses with size?

He trades really small size lot wise so even if he gets a big move against him it's still only a small loss.

Downside ofcourse a big move for him is only a small profit.

 

[SwingToWin]

I think exits are always important. I'd have lost too much already if I hadn't used exits.

I always use a mental exit, where I close the trade to prevent further losses. However I execute the stop manually, I have an alarm set around that price and get a message on my smartphone in real-time. Then I check and decide according to price action (also M5 and M1 candles) if I should get out, ie I believe it's a real break-out, or just a "fake-out".
Then I either stay in or give it a little (!) bit more time.

I also have an emergency SL that is about 2x or 3x my SL, in case I cannot react properly any more.

 

[loyek590]

He trades really small size lot wise so even if he gets a big move against him it's still only a small loss.

Downside ofcourse a big move for him is only a small profit.

what is a lot?

 

[Turveyd]

Personally I'm better off with a SL.............

But, I have a method with tight SL's, reasonably precise entries and there such that if the SL was to hit odds are the market would keep going that new direction, so better off out.

If you entry method isn't as good, then you'll need bigger and bigger SL size to allow for this, too tight and death by a 1000nd cuts.

Many traders / gamblers are going the no SL route these days, I say avoid this and keep looking for a method which supports tight SL's, no of them do better than with a SL long term, all works out to the be the same, if you trade badly it'll take your money either way.