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Originally Posted by thehawkman  Sorry, deleted it by mistake. Here it is this time. the problem with stops
I hope it's clear what I am talking about in that picture.
Going long at the green thumbs up, you would have been stopped at the red x only to see price return to where it was (the purple line). This would have merely made your broker richer, not to mention unnecessarily giving away 40 to 50 pips of your profits, and as you can see price returned precisely to where it was before.
I'll concede that not having a stop could mean that price could keep going down for days and result into a margin call. But if that is the case you are overleveraged, or rather, your lot size is too big because a leverage of 1:500 on a lot of 100 dollars isn't going to get you into a margin call on a large enough account, but on a lot of 200,000, that's a whole different story.
That is a demo account, looking at it, you can also see how averaging down combined with using known correlations would work for hedging. Alternatively one could use a second account, as a workaround for the NFA hedging ban (for all of you "lucky" Americans out there). |
What system are you using? To me idea behind using stops is to limit the downside of losing trades. But another equally important idea is to have more winners and larger winners with a risk:reward ratio of at least 1:2
I agree that stops will kill you slowly if you have a horrendous trading system. But it's not the stops that will get you it's the system.