Large Stops kill

I have been asked many times about the higher volatilities of certain currency pairs, “Wouldn’t it be better to use a larger reversal stops for certain pairs to avoid the unnecessary whipsaws?”

Hypothetically, it is the easiest way to make a trading system seem more profitable to use larger stops, they give a system plenty of room and time to reach its profit objective or exit point. However, larger stops will catch up with you in time and they will hurt you.

Traders will generally keep increasing the size of their stops until their system produces a hypothetically acceptable equity curve. They unwittingly curve fit their system to the historical data. By increasing the size of their stop, they manage to avoid incurring a string of losses; they believe they have discovered the optimal stop. But all they have done is to curve fit their system to their data only.

And invariably, due to the market’s maximum adversity rule, when they start trading, the market will deliver a new string of extraordinary losses they weren’t expecting. The losses will be so large that they’ll either be discouraged from trading or the losses will damage their accounts beyond repair forcing them to stop trading.

Stops directly define your initial risk; they affect your money management strategy for position sizing. The smaller the stop, the larger a position size you can put on. The larger the stop, the larger your initial risk and the smaller your position size. Remember, money management is the secret to survival and big profits.

A system using smaller stops with a lower expectancy will make much more money than one using larger stops with a higher expectancy when money management is applied. Larger stops kill money management performance. Larger stops kill big profits. If money management is the secret behind large profits, which it is, then small stops is the secret behind extraordinary profits.

So, please beware of and avoid using large stops. LARGE STOPS KILL!