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Illogical Stop Loss Placement:
"Trading is not a business of predicting, it is a business that involves hypothesizing and risk management"
It is common practice among novice retail traders to use needlessly wide stop loss due to fear of taking a loss and preserving their win/loss ratio. This fear is commonly caused by lack of knowledge and due to
insufficient research and back testing. They don't understand that losses happen and they are part of this business and that there is no place for fear, if you want to be a successful trader.
Professional traders understand this aspect and doesn't use arbitrary stop loss such as 30, 50 or 100 pips. Instead they place their stop loss at a price level which, if reached determines that a setup is invalidated and the price is very likely to continue to move against their analysis. Usually these price levels are established support/resistance or supply/demand zones closer to entry price because these are the zones where banks,
hedge funds and smart money place their stop loss. Once a trader starts thinking in terms of long term profit expectancy and not thinking about win rate he/she will realize the difference.
Let me explain, what I meant by long term profit expectancy, since very few novice retail traders understand the importance of long term profit expectancy (PE) = (probability of winning trade * average size of
winner) - (probability of losing trade * average size of loss). For example out of 100 trades taken your win rate is 60% and average winner is 1.2R (in terms of risk to reward ratio) and your loss rate is 40%
and average loser is 0.9R, so your long term profit expectancy is 0.36R per trade.
You could read my complete article here: http://www.dukascopy.com/fxcomm/fx-article-contest/?Path-To-Success-Part&action=read&id=1165
"Trading is not a business of predicting, it is a business that involves hypothesizing and risk management"
It is common practice among novice retail traders to use needlessly wide stop loss due to fear of taking a loss and preserving their win/loss ratio. This fear is commonly caused by lack of knowledge and due to
insufficient research and back testing. They don't understand that losses happen and they are part of this business and that there is no place for fear, if you want to be a successful trader.
Professional traders understand this aspect and doesn't use arbitrary stop loss such as 30, 50 or 100 pips. Instead they place their stop loss at a price level which, if reached determines that a setup is invalidated and the price is very likely to continue to move against their analysis. Usually these price levels are established support/resistance or supply/demand zones closer to entry price because these are the zones where banks,
hedge funds and smart money place their stop loss. Once a trader starts thinking in terms of long term profit expectancy and not thinking about win rate he/she will realize the difference.
Let me explain, what I meant by long term profit expectancy, since very few novice retail traders understand the importance of long term profit expectancy (PE) = (probability of winning trade * average size of
winner) - (probability of losing trade * average size of loss). For example out of 100 trades taken your win rate is 60% and average winner is 1.2R (in terms of risk to reward ratio) and your loss rate is 40%
and average loser is 0.9R, so your long term profit expectancy is 0.36R per trade.
You could read my complete article here: http://www.dukascopy.com/fxcomm/fx-article-contest/?Path-To-Success-Part&action=read&id=1165
