Because, for example, you have a setup that has an 80% win rate which requires a stop twice the size of your profit target. Do the math. Get Van Tharpes book "Trade your way to financial freedom" (Read the reviews on this sight). It will help you understand these concepts (expectancy,risk/reward,etc...)
I believe your assumption is correct. As for stop placement... I say they should go just beyond a level which "probably should have held" if your presumtion about direction was correct. That is, just above resistance for shorts... just below support on longs. You have to pick the buffer for "just beyond". You can arbitrarily risk less, of course.
I also agree with the posts that state the stop depends on the trade (setup). If you are trading right at a major trendline for example, then tight stops work fine. If your entry isn't so obvious, then a wider stop or scaling in may be the call. I killed a very large account several years ago due to lack of stops. Had one big trade go against me, and it never came back. I've been using them ever since. Jay
Pabst, I think there is a truism hidden in your sarcasm. If I had placed my initial entry were I had placed my initial stop on every trade I've made in the last 12 months I think I would have a much better performance record than I have. It's a matter of entering as close as possible to near term support and resistance and giving the stop some room away from that level.
Yea, right. I lost 20K doing what you just said. I still have my boots on; but it was a long time before I could buy another pair. Pabst, if you're doing what you just said, it will eventually catch up with you. When it does, will you come back and tell us how it feels?-- that is if you still have your boots on.
I think the best stops are mental stops, depending on your trading style of course. Three things can happen Trade going well --> So everything is good, and you start planning your exit point Trade going neutral --> Re-evaluate the trade and figure out if u want to keep holding, or try to put your money in a different trade Trade going wrong --> Re-evaluate the trade and the chart. See if you mis-judged it and if so get out. If you see a better signal, in your favor then hold on to it. Mental stops need <b>major discipline</b> though. I like to re-evaluate bad trades because I could have just came in a little too early...On and BTW, I trade options, not forex...
Many times ive pre-empted the movement in ForEx and entered a trade rather than wait for a entry point in the fear of missing a trade (Greed). This has led me to enter too far from a "stop zone", i.e. somewhere where resistance/support is give/take some movement for spikes. That leads me to get stopped out before the market moves in my favour as my stops are placed too close to support/resistance and spikes just take me out. Really anoying, and my worst problem. This leads me now to scale in with tighter and tighter stops and/or adjust my size depending on R:R for each trade and my entry position as it relates to the stop zones.
Some very good advice...thanks! When we talk about support and resistance levels, what time frame are you talking about if you are day trading Forex? I make about 20+ euro trades a day, and of course get different messages from different charts. The tick chart seems to be good for timing an exact entry. But the one, five, ten, fifteen, and thirty may look good, bad, or neutral all at the same time depending on which chart I'm looking at. Your thoughts are appreciated... Scarab