Does anyone have wider stops than take profit?

[meanreversion]

It's generally assumed that you need to "run profits and cut losses".. but some casual backtesting shows that you can make money the other way round as well. For example, if you had operated a 1:2 ratio (take profit after 0.5 pct move or stop loss after 1 pct move) in EUR/GBP over the last few months, you would have made money using RSI to get back on the trend. Obviously the win ratio goes up nicely and more than compensates for the occasional large loser. I don't use this method myself, but I'd like to hear from anyone who does.

 

[tenbobtrader]

"Obviously the win ratio goes up nicely and more than compensates for the occasional large loser"

you no it will continue

You will ride the eventual multi lose period out for how long exactly

The Risk of Ruin

The Edge

 

[meanreversion]

It's just a simple percentage target. Spot goes 0.5 pct in my favour, I take profit. 1 pct against me, I stop out. So this is looking for small wins whilst tolerating losses which are twice as large, in direct contravention to the "golden rule" of trading. Except that it makes money if you know what the trend is and enter on pullbacks. This results in lots of 0.5 pct wins and some 1 pct losses. The win ratio goes up to 75 pct+ PROVIDED YOU KNOW THE TREND. I've never heard of anyone using this method, but it can be made to work, and psychologically is quite rewarding as you get lots of "wins".

 

[meanreversion]

The drawdown is not that bad. With a 2:1 profit/loss target, it's not uncommon to have 5-10 losers in a row. With a 1:2 method, that is much less likely.

Is there anything statistically wrong with this approach??

 

[squall321]

i don't like anything less than a w/l ratio of 1

it seems to me that settling for a lower ratio, means a success% to breakeven goes up steeply
whereas settling on success%, means that w/l goes up shallow comparitvely

so running winners takes less effort

if that makes sense
there's probably some math word for it

 

[tenbobtrader]

"and psychologically is quite rewarding as you get lots of "wins".

agree and there imho lies the possible seed of ruin

you learn at deep level to perhaps do the wrong thing

think it is safer the other way round myself, add in slips and com and that bad run gets pretty psychologically hard to take

 

[meanreversion]

My long term win:loss ratio is around 35 pct, but that's because I've always been taught to run winners/stop out of losers. I suspect most trading robots operate a 1:2 w/l style in order to show very high pct win rates, maybe I should work on one of those and peddle it for £49.95 a time.

 

[rawrschach]

The drawdown is not that bad. With a 2:1 profit/loss target, it's not uncommon to have 5-10 losers in a row. With a 1:2 method, that is much less likely.

Is there anything statistically wrong with this approach??

No there isn't, but everyone has read in a book not to do it so they'll tell you not to. You figured this out on your own, with your own work, so don't let someone that doesn't know what you're doing tell you it won't work.

IIRC one of the market wizards traded with a wider stop than target.

 

[meanreversion]

But intuitively, it must be wrong because surely the reason most people lose money is because they run losers and t/p too soon?? Hmmmm this is thought provoking ..

 

[meanreversion]

Seems to boil down to correct identification of trend. If you ride a trend long enough, it won't matter if you are 2:1 or 1:2. I've just tested 1:2 in GBP/CHF for the last 3 months going SHORT (i.e. counter trend) and the drawdown is pretty bad although finishing p/l is fairly flat.

I'm always trying to minimize drawdown, so that might be why this is not a great system!?

 

[squall321]

But intuitively, it must be wrong because surely the reason most people lose money is because they run losers and t/p too soon?? Hmmmm this is thought provoking ..

it depends on you talking theory
or real life

in theory you can make money with a success% of 5%, and a w/l ratio of 20
or with a success% of 97 and a w/l ratio of 0.05
is this happening anywhere in real life?

there's got to be a point where the threory breaks down because of the market/human psychology/etc

 

[Trader333]

Does anyone have wider stops than take profit?

Many of the "Holy Grail" MT4 EA have stops much wider than profit targets and in some cases by a factor of over 10 to 1


Paul

 

[meanreversion]

excuse my ignorance, what is MT4 EA?

 

[candles]

EA = Expert advisor (automated trading system)
MT4 - Metatrader4 - forex trading platform

 

[Technically Fundamental]

I've wondered about this too. Do people weigh up risk reward against expected probability of target hit of just discount a trade if it doesn't present a favourable risk reward. there is never a 100% guarantee that you'll hit your target anyway is there?

 

[shadowninja]

It really depends how often the losers are. I usually trade with a 1:1 ratio but depending on the market, may let it run to 2:1.

 

[Technically Fundamental]

It's things like this why I haven't yet been able to come up with a set of trading rules and a comprehensive trading plan. I'm a simple creature by nature and as such I must deal in absolutes!

 

[Hoggums]

Got to agree, I find that I am much better off these days exiting the position at the first sign of danger and getting back in again if it turns to be a false alarm. It means I never see a profit turn into a loss. As a consequence my R:R is on average just slightly over 1:1.

 

[Technically Fundamental]

I should do that.

 

[GammaJammer]

do a search on "Spanish89" on this forum. Now that was a kid with a novel approach to R/R.

Ridiculous he may have appeared at times, but there were aspects of the debate surrounding his supposed methods that made revealing reading. Plus some stuff so funny you might actually soil yourself.