should the stop be greater than the limit ?

Pat494

Legendary member
Messages
14,614
Likes
1,588
Looks like a simple question, but is it.
Say one has a stop of 2 points on the S&P 500 and a target of 2 points. Nicely balanced you might say. Then we get to the what if.......

what if the stop is 2 points and the taerget 3 or 4 points. Fewer winning trades probably but more points when successful.

what are your thoughts on this tricky question ?
 
Never letting your winners run seems suicidal. I just read hari-kiri prompted by Mr Charts in another thread. Hence the thought popping up.
 
Re: should the stop be greater than the limit ?

Erm, … What about if you used your win (at the increased odds) as a base to pyramid??
 
Never letting your winners run seems suicidal. I just read hari-kiri prompted by Mr Charts in another thread. Hence the thought popping up.

During choppy markets letting your winners run is exactly suicidal. You will get lots of losses or BE. The real trick is knowing whether the market is currently trending or consolidating. Sounds easy!

Peter
 
Just to add, some traders use counter trend methods. Trying to let winners run with reversal type of trades ranks just below martingale trading as a fast way to lose money.

Pat, IMO opinion using the exact stop and limit on every trade regardless of the ratio is not the best way to go. You need to adjust according to the volatility of he market. What works best for me is small stops and small wins @ a R/R of approximately 1:1.5 ratio. This has done well for me in many different market conditions. Of course taking a small win and then watching the market continue in your direction for another 100 pips can sometime be just as depressing as a small loss :)

Peter
 
Last edited:
Just to add, some traders use counter trend methods. Trying to let winners run with reversal type of trades ranks just below martingale trading as a fast way to lose money.

Pat, IMO opinion using the exact stop and limit on every trade regardless of the ratio is not the best way to go. You need to adjust according to the volatility of he market. What works best for me is small stops and small wins @ approximately 1.5:1 ratio. This has done well for me is many different market conditions. Of course taking a small win and then watching the market continue in your direction for another 100 pips can sometime be just as depressing as a small loss :)

Peter

Peter, is the 1.5 the stop or the win?
 
D'oh, I typed it in backwards :eek:
.
Fixed it :)
1.5 is the win (y)

Peter

I do the same for some reason I always write the R:R the wrong way round.
I think it's because the bigger number first flows off the tongue more easily.
 
Last edited:
some interesting replies. Thanks guys. I will try your ratio Peter and see how it goes. Surprised noone mentioned trailing stops tho.

Sometimes I use the bollingers to make as st and tp. With mixed results. The advantage of those is that stops and target prices are put wider in volatile markets.
 
Last edited:
What suits me Pat, is to open two positions with the same stop (the distance varies from trade to trade). But I set one position with a 1:1 (to tp), and leave the other to trail as long as the trend continues.

This really shows that the stop is as individual as the trader. This method suits me because I aim for multiple low cost (short stops) entries into long term trends.

It would not suit you because you are a short term scalper.

It also suits me because I become scared of losing money on a trade, when the shorter term time frame swings price back down near my stop. So my stop loss strategy is designed to overcome my fears with the knowledge that my stop being hit would only result in a b/e.

This may not suit for you, because you may not have this fear. You may well think ‘What a wasted part of a trade!’ and for you, you would be right.

(P.s. I also use Peter’s 1:1.5 for short term mean reversion trades if I am bored while waiting for my dallies, for me this is because going for anything higher than 1:1.5 would give me less wins and I would get upset, when this type of trade is just add hock for fun.)
 
What is more important than whether a stop (risk) be greater than the limit (target/reward) is expectancy over any given sample size of trades you take, and it follows that you should always aim for a positive expectancy - the higher the better. (Simple Expectancy = total pip gain or loss in the sample divided by total number of trades in the sample = expectancy/trade.) If you have a high strike rate (ie winning trades as a % of total tradesd) then having a stop greater than the limit may not be as much of a problem than that experienced with a lower strike rate. Expectancy is also generally more important than strike rate. The answer in short text is that it is relative to the edge you are trading and the performance metrics you are achieving with it, although letting winners run and cutting losses can only enhance performance over time.

G/L
 
Last edited:
The only method that works consistently for me with shorter TFs is to use stops and limits tailored to the particular market and its behaviour when you're in the trade. Whatever the theoretical RR, using a static stop or one close enough to be triggered by 'noise' is doomed to failure.
 
I'm with most of you guys here. I set a limit that preserves my RiskRet ratio of 1:2
I dont care if shoots off, It'll come back again
 
What is more important than whether a stop (risk) be greater than the limit (target/reward) is expectancy over any given sample size of trades you take, and it follows that you should always aim for a positive expectancy - the higher the better. (Simple Expectancy = total pip gain or loss in the sample divided by total number of trades in the sample = expectancy/trade.) If you have a high strike rate (ie winning trades as a % of total tradesd) then having a stop greater than the limit may not be as much of a problem than that experienced with a lower strike rate. Expectancy is also generally more important than strike rate. The answer in short text is that it is relative to the edge you are trading and the performance metrics you are achieving with it, although letting winners run and cutting losses can only enhance performance over time.

G/L

bbmac has put his finger on a really important point here.

If your expectancy is positive (confirmed over a decently long and typical trading history) then you can assess thing like stop distance/limits and tweak them for optimum result. The key is to maintain records and analyse them. You can't do it by gut feeling (well - I can't). Once you have confidence in the probability of your expectancy then losers, cutting losses, strike rate etc become easy to deal with and the psychological issues are under control. That's my experience.
 
I used to think that each trade was all important and that my job was to wring as much out of that trade as possible. I had a performance measure of "%age of move gained" which I was constantly trying to improve.

Nowadays, though, I guess I am guilty of trading my account rather than the trade. I know the minimum I must take from a trade (when it goes right) to ensure that my account keeps ticking along healthily and I try to ensure that I get it even though my aiming point may be better.

So, I won't take a trade unless I reckon (on my assumption of potential price action) that reward to risk is better than 1.5:1 and I will protect that level even if my target zone (again, on my assumption about potential price action) is at 3:1. Should price reach that target zone I'll look to get out unless momentum is strong. If I'm not about there'll be a limit order in place.

Like malaguti and wacky I don't much care if the thing shoots on much further. I'll have got better than I needed and there will likely be another set-up arriving anyway.
 
Yep
A lot of sense being generated here on the stop and limit issues.
Newbies take note
 
Ok, so say you've entered a trade, stop 25, target 50. Price moves 25 in your favour, your position is now such that you have a stop 50, target 25. If you never have a stop larger than the target, then you must either have already taken the profit, or you move the stop up so that your risk is less than your profit. This leads to complications though, since just trailing stops up in a fixed way like that will reduce your profits.

So the conclusion to this dilemma is...
 
Top