Methodological Dilemmas… Whether to Use Stop Losses?

Filed under: Learn Forex Trading |

We currently have a bit of a dilemma with our live trades: this being whether or not to use trailing stops. On the one hand, trailing stops give us a little bit of added insurance when things are not going our way. It mitigates losses and sometimes turns a loser into a slight profit. On the other hand, they can also cut profits short, and reduce a potential big winner into a slight profit. So what do we do? Do we go for slow and steady profits, or do we go for the big winners but also take a fair few losses?

 

I think the decision of whether to use stop losses or not very much depends on your personality. If you have the mental strength to be able to take losses in order to have the opportunity to get big gains, then you should probably not use trailing stops. Alternatively, if you find losses to be too painful an experience, then you should probably use trailing stops so that your winning percentage is higher.

 

What happens to your equity curve (you bank) when you use trailing stops is that it becomes smoother, with much less volatility. However, the incline is also much flatter, and it takes longer to move up. On the other hand, when you do not use trailing stops, you equity curve become more volatile. The drawdowns are larger valleys but the peaks are also more majestic. The chart also moves up (or down if you do not have a market edge) with a steeper incline, and profits (or losses!) are larger.

 

Essentially, whether to use trailing stops or not is a risk-reward scenario. Are you prepared to risk more to gain more? Or are you happy with small and steady returns? The choice, ultimately, is up to you.

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