Stop Loss

OK...

So let me take two comments from my post

1. "for the most part a stop should be implemented."
2. "In general a stop should generally be used."

I clearly fully advocate using a stop loss. period. Especially if you are at the beginnings of your trading career.

However... and I will quite happily repeat myself here... There are certain times when a stop loss is not ideal.. please note that I am not necessarily saying that you should not have a stop loss I'm saying that it can, on occasion, be a disadvantage.

Now lets tackle your points in your post.

1. Not being responsible - As reiterated above I advocate using stop losses. If you are learning to trade then use them 100% of the time. However there are times when you have other options open to you if you employ the right strategy.

2. No consideration to R:R - Again you need to expand your horizons somewhat here. do you realise that mathematically having a risk:reward ratio of 1:2 with 50% winners is as profitable as having a risk:reward of 8:1 with 90% winners? most traders who are learning simply try and have their take profit level twice as far away from entry as their stop level and claim that they have a r:r of 2:1 however this 2:1 number means absolutely nothing unless you have the winning % to back it up. I have a massive view on r:r but I also have a massive focus on trade success probability as well. and that is where a lot of traders lack the understanding of r:r. I'm not saying to just let your losing trades run. That is a sure fire way to blow up an account. However there are ways where you can trade without a stop loss being implemented.

In my opinion having an emergency stop loss (to use your words) is idiotic. A stop loss should only be placed at a price level where if price gets to a certain point it proves that the reason for entering the trade in the first place was incorrect. Just having a stop loss placed at a random point as an emergency is, in my opinion a waste of money should it be hit.

As an investor I have many vehicles that I can use to trade. I can trade spot, short term futures, longer term futures, call options, put options, and I can also combine investment vehicles to create synthetic positions of the above and I can use these vehicles to either speculate or hedge current positions.

Here is an example: I am long EUR/USD I do not have a stop in place. Price is moving against me. What do I do? 

(1) I can close out the position which I don't want to do because I am happy with the price that I got and believe that it will go in my favour. 

(2) I can enter a stop and risk getting stopped out and losing my position. 

(3) I could do nothing and risk exposing myself to large downside.

(4) I could buy a put option which combined with my long position would create a synthetic call. Which in effect would allow me to keep my long position and profit from any upward movement in price while limiting my downside for as long as the option is held or until the option expiry.

(5) If I thought that there was a discrepancy between the current interest rates in the countries pairs and the price of the futures contract of the pair and that the cost of carry was overpriced (the difference between the spot price and the futures price) I could sell the future thus creating an intramarket spread trade which would hedge my long position and also, depending at what price the spot was when I sold the future I could make a profit based on to the narrowing of the spread as the future nears it's expiration date.

(6)If I notice a discrepancy in put/call parity (call premium - put premium = spot price - strike price) if the c-p was greater than the s-k then there may be an opportunity to carry out an arbitrage trade by keeping my long spot position and the selling a call and buying a put. this creates a synthetic short position in the market using options and thus hedges my long position but allows a profit to be made over time from the discrepancy in the parity formula. As the options approach expiry this return will be realised.

Now I have got a little technical above however my main point is there is. In essence, more than one way to skin a cat. And for you to naively say that it is idiotic to not always have a stop loss shows a lack of understanding on your part and I would urge you to educate yourself some more in the markets and the instruments available to you.

And before anyone says that babypips is all about trading spot then I would suggest that in actual fact this website is about learning to trade forex and as such your learning should not stop with learning about a few indicators or learning to trade price action. You should always continue to develop your knowledge and skills and this should go beyond just the spot markets. Believe me the big boys don't only trade spot alone but have a view on all the options available to them.

I would also suggest that perhaps next time you see a post that you don't agree with, instead of questioning the responsibility and calling them an idiot you perhaps enter a more constructive conversation with them as to why they have an opinion or view on something that is different to yours. You never know, what they come up with may just be the edge that you have been looking for.

DT.

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