Trading With Large Stop Losses
- How you can use large stop losses to improve your trading, especially if you are new to forex trading.
- The idea is to use large stop losses and very small position sizes.
- This way you can afford to make mistakes and stay in the game, hence learn from your mistakes and learn from it.
- Although the amount at risk is small, the mind is still exposed to the psychological stress which trading entails, and this is a good way of learning how to handle such aspects without putting your entire account balance at stake.
It should be clear by now that you must acquire a significant amount of experience before you can trade the forex with well-designed stops and profit targets. Unless you know what you are really doing, the forex market has such an unpredictable nature that it is easily capable of shutting down your positions protected by small stops, only i.e. up to 50 pips. In addition, this position is made more complex because you have been also well-advised to develop trading strategies that have good risk:reward and win:loss ratios.
So, how do beginners have any plausible chance and hope of trading the forex market profitably? Starting out small with real money is one way to go; one with which I personally achieved considerable success. At first sight, my strategy looks very strange as its main concepts appear to contradict many of the recommended principles associated with forex trading.
Basically, I am suggesting that you trade using a very large stop, on the order of 500 pips, while plundering profits of 50 pips or so per trade. This idea could even be considered as a macro version of the scalping strategy favored and employed by many forex robot designers. With this strategy, the idea is to nip in and out of trades very quickly both exposing the trader to minimum risk as well as seeking very small profits of 5 to 10 pips. In addition, a strategy such as this is best applied when the Forex beast is slumbering, such as times when there is no fundamental news due for release at all.
Returning to my strategy, you will appreciate immediately that a large stop of 500 pips is extremely difficult for even the forex market to knock out, while giving you a good chance to be in at least a small bit of profit. This provides a base for beginners to trade because they no longer need the essential knowledge that is required to protect normal trades. However, the idea here is that you should try to learn - not take gambling trades - just because you use a large stop loss. You should still try to pinpoint optimal entries and exits, move stop loss to break even when possible, etc. A risk:reward of 10:1 against you seems appalling. However, you must understand the effort required by the forex to knock out a 500 pip stop is exponentially higher than that of closing down a 50 pip stop.
So, the idea is to achieve a very high win:loss ratio which will then offset the poor risk:reward one. For instance, if you are able to achieve 11 wins of 50 pips against 1 loss of 500 pips, then you would have realized a profit of 50 pips. However, although this sounds good, this technique must be performed in the correct way. If you are not careful, your trades could get marooned in negative territory. The market price could then stay within this region for lengthy periods of time e.g. months. If this were to happen, you would be denied any possibility of registering a profit during this time. To solve this problem and similar ones, you need to use a very good money management strategy. I recommend you risk only 0.10% to 0.25% of your entire available budget on any one trade. By doing this, you provide yourself with a defense to preserve the majority of your budget should your 500 pip stop be hit. In addition, you will have the luxury of allowing a few trades to become marooned for some time while waiting for them to return to profitable territory.
Also, by risking so little you will be able to open a number of trades at the same time. The great advantage of this trading method is that it allows novices room to make mistakes which they would not enjoy if they continuously utilized small stops of 30 pips per trade.
You may say that gaining 30 to 50 pip profits is very small and would have a limited positive effect on your budget. But realize that a successive number of wins enables you to achieve an exponential monetary growth even if your targets are a small percentage of your budget.
You might ask why you cannot risk a larger percentage of your budget e.g. 10%. It seems that you should be able to do this because you are using such a large stop. However, this is definitely not a good idea especially when you realize that 10 successive losses using 10% risk per trade would consume 66% of your original budget. In contrast, risking only 2.5% per trade would lose only 17.5% of your original budget. Clearly, the second case is far more desirable as its extends your trading life as well as providing more protection for your budget without which you can no longer stay in the game. By applying the different trading methods outlined within this book, you will be able to win many profitable trades against a few losses. You must also realize from the outset that you will not become a forex expert overnight in the same way that doctors, surgeons and lawyers do not. As such you must adopt a very professional approach to using all your trading strategies including this one.
I recommend that you evolve a low-risk trading system into a high-risk one in small step increments. This method is ideally suited for beginners using my large stop strategy for the first time.
The initial low-risk configuration of settings consists of:
1 lot traded only, a max of 0.5% of your total margin will be traded and preferably only one currency pair will be traded at any time and only one trade will be active at any one time.
Once success has been achieved with a low-risk operational configuration, higher risk ones can be introduced by altering the settings one at a time. After a series of successful advancement, you will eventually be able to use my trading system with the following settings:
More than 1 lot can be traded, a max of 5% of your total margin will be traded, more than one currency pair will be traded and more than one trade can be active.
This methodology allows you to experiment in small increments of risk rather than jumping into a new trading situation before knowing exactly what is happening. In addition, you will observe some of the concepts that have been discussed in this book, which will enhance your chances of gaining increased profitability.
The main ones to consider are:
- If possible, always try to trade with the trend. We want to swim with the tide, not against it.
- Use the processes that I have already outlined to help distinguishing fakeouts from the very profitable true breakouts.
- Consider moving your stop loss to breakeven after a suitable potential profit has been recorded. You will then be able to experience the benefits from risk free trading at an early stage.
- Remember to aim for small profits of about 50 pips. Do not forget that a successive number of such wins will produce an exponential rise in your budget known as profit compounding.
- Finally, avoid trading with large stop losses when any major fundamental news is due for release. This is because these events can produce very large increases in volatility that can cause extreme random price movements.
One of the main features of this strategy is that you are not trying to achieve 500% profit per month. In spite of many claims, I have yet to see any system which continuously produces more than somewhere around 10 – 15% a month, and even those systems will have losing months. Instead, not only are you are seeking small returns but you are also buying yourself the time to learn and develop a feel for the forex market.
In summary, you should find this large stop trading strategy useful; especially if you are a newcomer this should be another way to help you in providing a basis for you to achieve successful forex trading.
Table of Contents
- Legal Notice
- 1. The Importance of Using a Forex Trading Log
- 2. Through the Eyes of a Beginner
- 3. Thoughts on Fundamental News
- 4. Trend Following or Bottom-Top Picking?
- 5. The Joy of Risk Free Trade
- 6. The Importance of Risk:Reward and Winning Percentage
- 7. Technical Analysis
- 8. Separating Breakouts from Fakeouts
- 9. The Correct Use of Correlation
- 10. You Must Have an Exit Strategy
- 11. Breakout Trading Strategy
- 12. Trading Trend Retracements
- 13. Trading the Fundamental Data Releases
- 14. Picking Tops and Bottoms
- 15. Trading Gaps
- 16. Trading Fakeouts
- 17. Trading With Large Stop Losses
- 18. Candlestick Confirmation