In this episode of Truth About FX, Walter dig into the topic of stop loss and if you should — or should not — wait for it to be hit before deciding your trade’s fate. According to him, it is important to ask yourself: is there a reason for the market to turn around at this point?
Hugh also identifies his own method which relies heavily on price action and instinct.
Download (Duration: 05:10 / 5.92 MB)
In This Episode:
00:37 -should I stay or should I go?
01:02 – hands-off
02:29 – time to get out
03:12 – set and forget
04:05 – the real kicker
Announcer: Sometimes, forex trading is a wild and wooly place to be. That’s why Hugh is here, to post your questions to Walter, the naked forex guy. Hugh’s got questions and Walter’s got the answers. Here at the Truth About FX Podcast.
Hugh: Hi, Walter! Do you recommend getting out of your trade before your stop is hit?
Walter: Here is the thing: if you are one of those people who finds yourself getting into a really should-I-stay-or-should-I-go sort of thing and you talk yourself out of a trade, you moved down to the lower timeframe to see if you can figure out what is going to happen. That kind of stuff is going to get you in trouble.
So, I would not recommend doing that if you are that kind of a trader. You need to set and forget. You need to hit your stop loss or your exit or your take profit, like that needs to happen.
If you are more hands-off then you can do what I do which is, typically, my stop loss is like my worst case scenario. Sort of like I am asleep at night, something happens in the markets and the market is gone like three hundred pips in other direction and it stops me out. That is really how I look at my stop loss.
I don’t like to see it hit and most of the time. If I have a losing trade, my stop loss will not be hit. I actually get out if it goes, say, seventy, seventy-five percent of the way toward my stop. I am usually thinking, okay. I’ll look at it and say, “Is there a reason for the market to turn around here?” Does it look like it is going to turn around?
If the answer is no, then, I’ll usually dump the trade. So, what that means is I am reducing my average loser and it’s not the full one point zero R to use risk management’s peak. If you do not know what R is, Van Tharp’s book talks all about R and I’m sure most of you will understand that concept. That is how I do it, I get out in most cases long before it hits my stop.
Occasionally, my stop is hit and it really bumps me out and I do not like to do that. I do manage my trades and again the question I ask when I see the market go against me is: Is the market giving me a signal that would suggest I should get into a new trade and is that new trade in the direction of my trade that I am in?”
Or, is it in the opposite direction? If there is a signal to go in the opposite direction then, obviously, it is time to get out. That is how I manage it. I would be interested to hear how you do it, Hugh. Do you just let it hit the stop or the target,? How do you do it?
Hugh: For me, maybe eighty percent of the time, I just let it hit the stop loss but there was that twenty percent of the time where if the price action does not look good, and I have this really strong gut feeling that it is going to hit the stop, then I’ll get out a little early and save myself a little bit of money. Nine times out of ten, that works out so that is why I do it. If it really is an unnecessary fatal with it or, do you have some sort of a gut feeling, then you know it is going to be a loser.
Walter: Yeah. And so, some people are really going to argue for leaving a “set and forget” and for those traders, it is really important to stick to your rules. I think those traders are the ones that feel really bad when they get out of the trades that initially goes against them, and so they get out and then it turns around and turns out it would have been a profitable trade.
If that is the hardest thing for you to deal with, as a trader, then you probably need to go “set and forget”. If you find yourself dropping to a lower time frame and trying to predict based on lower time frame, not the time frame that you used to enter, then maybe you need to also use “set and forget”.
If you think you can be pretty objective and can decide like “Am I getting a signal in the opposite direction now?” If the answer is yes, then it’s time to pull the plug even if my stop hasn’t been hit. That’s the way that I would go with it. I know it’s really tricky and I think every trader has to decide for him or herself.
To me, the real kicker is I’m able to reduce my overall risk. My losers are actually much smaller than they should be because I used to scratch and get out of the losing trades. It is not for all traders, I understand that, but to me that is the most important thing. It’s to make sure that I bumped up my risk to reward ratio.
Simply by eighty-five, ninety percent of the trades that go against me and gets stopped out that are losers, they don’t go the full length and hit my stop loss. I usually will get out long before. This year, I think, I’ve have had two maybe that hit the full stop so I don’t necessarily like to see my stop hit.
I tend to try and interpret price action, basically, and that is my bent. It’s up to everyone to decide, really, but it is a great question.
Hugh: Cool! That was a great question to ask yourself. Is it worth getting in the same direction or is it going to go against us?” Thanks for sharing that.
Walter: Sure, thanks. See you.
Hugh: See you.