Dangerous Trading or Opportunity?
The use of very large or zero stop losses to create a high percentage of winners
Introduction:
In the world of Forex trading, conventional wisdom strongly advocates for the use of stop-loss orders to mitigate risk. However, a counterintuitive strategy has emerged, employed by some of the most successful signal providers: trading with minimal or no stop losses. This approach, while seemingly reckless, aims to achieve a high percentage of winning trades.
The Traditional Stop-Loss Rule:
The mantra “never trade without a stop loss” is ingrained in most Forex training. This rule, central to sound money management, is designed to limit potential losses by automatically closing a trade when it reaches a predetermined price.
The Alternative Approach: Large or Non-Existent Stop Losses:
Contrary to traditional advice, some traders, signal providers, and automated system developers utilize exceptionally large stop losses or forgo them entirely. In some cases, the stop-loss to take-profit ratio can exceed 100:1.
Example of a Large Stop Loss:
To illustrate the magnitude of these stop losses, consider an example of a SELL trade in EURUSD where the stop loss is calculated as follows:
Source: www.eToro.com
Stop Loss = 1.3850 – 1.2889 = 961 pips
In this particular scenario, the trade had been open for nearly two months, with the signal provider waiting for the market to move in their favor. This demonstrates the extended duration and potential risk associated with this approach.
Why Some Top Traders Abandon Stop Losses:
Surprisingly, many of the most followed and profitable signal providers, managing substantial equity, operate without strict stop-loss orders. When questioned about this practice, a leading signal provider from a major platform explained that they manage significant drawdowns manually and maintain a strategy that has proven successful over time.
The 100% Win Rate Paradox:
Another prominent signal provider, claiming a 100% win rate on a platform with a large social trading community, employs extremely large stop losses, sometimes reaching 1000 pips, coupled with small profit targets per trade.
The Prevalence in Automated Systems:
This practice isn’t limited to individual traders. An investigation into leading automated Forex trading systems and robots reveals a similar trend – a prevalence of scalping systems with very large or no stop losses and small profit targets. This approach carries a significant risk: a single losing trade can erase months of accumulated profits. As one trader noted, “You can lose three months of profit in one loss trade! I know – it has happened to me.”
The Apparent Contradiction:
The use of very large or no stop losses seems counterintuitive. As one trader questioned, “So what is going on? This does not make sense!”
The Underlying Motivations:
The use of large or non-existent stop losses is often observed among:
Contestants in trading competitions: Where the focus is on generating impressive short-term results.
Signal providers: Who aim to attract more followers by showcasing a high win rate.
Developers of automated systems: Seeking to enhance the appeal of their products to potential buyers.
Understanding the Risk-Reward Relationship:
It’s crucial to recognize the fundamental relationship between profit and risk in trading. Higher potential profits are typically associated with higher risk. Strategies that boast high win ratios often come with substantial drawdowns, prolonged trade durations, and the potential for significant losses that can negate months of gains.
Key Considerations:
High Win Rate vs. High Risk: This strategy prioritizes a high win rate but exposes traders to substantial potential losses if a major market reversal occurs.
Manual Drawdown Management: Successful implementation often relies on the trader’s ability to manually manage drawdowns and intervene before significant losses accumulate.
Prolonged Trade Durations: Trades can remain open for extended periods, tying up capital and increasing exposure to market volatility.
Psychological Impact: Trading without stop losses can be emotionally challenging, requiring a high tolerance for risk and the ability to handle potential losses.
Market Volatility: This strategy is very susceptible to high market volatility.
Potential for Large Losses: A single losing trade can wipe out months of profits.
Conclusion:
While the traditional stop-loss rule remains a cornerstone of risk management for most Forex traders, the practice of using minimal or no stop losses is employed by a select group of highly successful individuals and automated systems. This controversial approach, often driven by the pursuit of high win rates and influenced by the motivations of signal providers and system developers, highlights the diverse strategies and risk tolerances within the Forex market. However, it’s essential to acknowledge the inherent risks, including the potential for significant losses and the emotional challenges associated with this strategy.
Analyzing High-Risk, High-Reward Forex Trading: Can You Profit Safely?
Introduction:
Some Forex traders, often with impressive performance figures and large followings, employ high-risk strategies. These strategies may involve trading with minimal or no stop losses and aiming for small profit targets, but with the acceptance of large drawdowns. This raises a crucial question: can traders achieve consistent profits with acceptable risk using these methods?
Examples of High-Risk, High-Reward Trading:
One prominent trader on a major signal provider platform uses NO stop losses, targets small profits, and tolerates drawdowns of over 700 pips. This trader has amassed over 12,000 followers and manages more than $21 million in equity. Their top follower has reportedly gained over 4,000 pips in the past year.
Another trader on a different platform utilizes stop losses around 1000 pips and has attracted over 20,000 followers, with more than 3,000 automatically copying their trades. This trader claims a 145% profit over a 6-month period.
The Pitfalls of High Win Ratios:
It’s a common misconception that a high win ratio guarantees profitability. Consider this example:
A system with a 96% win ratio
Stop loss: 1000 pips
Profit target: 15 pips
Position size: 1 standard lot
Maximum open trades: 1
In this scenario, a single large loss can negate the gains from numerous small wins. For instance, if there is one 1000-pip loss and three 200-pip losses within 100 trades, the total loss would be 1600 pips, or $16,000. The 96 winning trades would yield 1440 pips, or $14,400. This results in a net loss of $1,600.
Key Takeaway: A high win ratio does not automatically equate to a profitable system. In fact, strategies with higher win ratios often carry greater inherent risk.
Managing the Risks of High-Risk Strategies:
To navigate these high-risk systems, traders must prioritize risk management:
Adequate Capitalization: Ensure your trading account has sufficient equity to withstand substantial drawdowns and potential losses. This prevents premature account closure due to margin calls and allows for position recovery.
Conservative Position Sizing: Employ smaller lot sizes (mini or micro lots) to limit the capital exposed in each trade. This reduces the impact of drawdowns and losing streaks.
The Trade-off Between Risk and Return:
Even with sufficient capital and conservative position sizing, high-risk strategies often lead to a lower return on investment (ROI). The pursuit of high-percentage profits may necessitate an uncomfortably high level of investment and/or very small profits per trade. Traders may find that similar ROI levels can be achieved with lower-risk systems that have less severe drawdowns and smaller stop losses.
The Question of Suitability:
Ultimately, traders must evaluate whether the stress and potential for significant losses associated with high-risk, high-reward strategies are justified by the achieved returns. A safer trading approach might yield similar results with less risk.
Conclusion:
The allure of high win rates and substantial profits can be tempting, but it’s crucial to understand the inherent risks of high-risk Forex trading strategies. Proper risk management, including adequate capitalization and conservative position sizing, is essential. In many cases, the returns offered by high-risk systems may not outweigh the associated dangers.
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