Placing target 2x Stop loss is overrated

Discussion in 'Risk Management' started by faith4more, Jul 28, 2010.

  1. Been trading for a long time. Many will tell only way to be profitable is to at least have target/ stop loss ratio at 2x or above with target being at least twice the stop.

    I disagree. Have live traded, tested to the nth degree, rehashed, reworked etc..... for 10 years.

    My conclusion wide stops and tight targets work perfectly fine. I run a stop 2x wide as my target with the trend and consistently get great results.

    Every market, and every strategy is different but this works for me.

    It is also a myth that only way to make money in market is let your winners run. You can make it that way but your profitability will depend on a few trades where as defined targets spread out your profits among many trades. If you happen to miss those few trades where there were runners your blown.
  2. Bad traders take bad risk-reward propositions. What is your hit rate?
  3. I get stopped around 20% of the time. I usually average a 1.8 profit factor. I resisted wide stops for years but was putting way to much weight on width of the stop in my analysis. I am not saying it is not important but profit factor trumps it. I refused to go wider out of fear even though my numbers were telling me something different.

    Of course each strategy has different parameters and some strategies potentially will get you killed with wider stops especially ones that take a lot of trades. I maybe trade 130 times in a year and never hold overnight so it is very controlled. I also use strict money management.

  4. We used to have a customer at the bank using that kind of strategy.. Very tight target and let the market goes against him....

    He made money for about 4 years mainly in the carry trade pairs. In 2008 and the Lehman problem.... He did the same thing.... It will come back...

    Now he still long GBP/JPY, CAD/JPY, Cable etc.. right at the top... HE lost twice as much in few months what he made in few years...

    It s pretty similar to your strategy but at least you are using some stop.

    Personally I could not live using that kind of strategy, I am glad it s working for you.

    I wish you luck.
  5. olias


    I haven't found a way, but I value your input. Maybe opening up people to the idea of using wider stops and narrow targets could be the difference-maker for them. The most important thing is that you have rules and stick to them rather than trying to wing it
  6. R/R is meaningless as far as profits. It all depends on the win rate. If you have an edge with a high win rate, you can have target/stop < 1.

    This paper shows the relation of R/R to win rate and the author discusses some of the possibilities.

    I prefer to stay at the middle of this with target/stop =1.
  7. LeeD


    Every trader creates their own sets of rules: whatever works best. "Target >= 2x Stop loss" is exceptionally good at sending a beginning trader in the right direction:
    1) Having target substantially larger than stop helps the bottom line. Even if only around 50% trades are successful, this rule leads to a good profit factor.
    2) The rule creates the right mindset: wait for good trade opportunity. Even if set-up is there, the rule requires a good entry price. If a good entry price is not reached, patiently missing a perfectly good set-up improves discipline. The importance of waiting for a perfect set-up and then for the right entry should not be underestimated.
    3) Lower absolute loss per trade makes it easier to fully "accept risk", start a trade and execute the stop in a disciplined way.
    4) While psychology is not there yet, lower loss per trade offers better tolerance to mistakes.
  8. Couldn't agree more.

  9. bigb


    yes both ways could work and are appropriate as long as the win% is in line with your R/R. Some are better at swinging for homeruns but strike out more. Others go for singles and occasionally strike out. I too prefer the singles strategy of the daily grind.
  10. bigb


    I see what your saying but I don't see how this example relates to what the OP is pointing out. He is saying to use stops but that your targets don't have to be twice as big to be profitable. He is also talking about a finite period trade.
    #10     Jul 29, 2010