### More on Setting Your Stop Loss

Using a stop-loss of any size (other than a very, very large one) almost always degrades the performance of any trading system. It's true that a good trade rarely moves to far against you, but I find that almost all the advice I read severely underestimates just how 'far against you' the price can go before it should be considered 'to far'.

To illustrate the effect of tight stop-losses on a trading system I am going to use stop-losses of various sizes on an 80 breakout system with a 20 day time-based exit. Whenever the EUR/USD closes higher than it has ever closed in the previous 80 days we enter a long position, which will be automatically exited after 20 days or when the stop-loss is hit, which ever happens first. And whenever the EUR/USD closes lower than it has ever closed in the previous 80 days we enter a short position, which again will be automatically exited after 20 days or when the stop-loss is hit. The stop-losses will not 'trail' and will stay fixed at x number of points above or below the market when the trade was first entered. I will test this system with stops of 200, 400, 600, 800, 1000, 1200, 1400 and 1600 pips. The results are found in the below table.

The return of trading this system with no stop-loss before the costs of trading is 2.20 to 1. With a stop loss of 600 pips or less this system's returns were seriously degraded, whilst the best performing large stop-loss of 1,000 pips performed only slightly better than 2.20 to 1. My conclusion is therefore that any stop-loss, other than a very, very large one, almost always degrades the performance of some trading systems.

 With a 200 pip stop-loss Number of wins: 177 Number of losses: 173 Percentage of winning trades: 50.6% Number of pips won: 55,614.1 Number of pips lost: 30,379.9 Win to loss ratio: 1.83 to 1 With a 400 pip stop-loss Number of wins: 212 Number of losses: 138 Percentage of winning trades: 60.6% Number of pips won: 62,480.3 Number of pips lost: 34,174.2 Win to loss ratio: 1.83 to 1 With a 600 pip stop-loss Number of wins: 214 Number of losses: 136 Percentage of winning trades: 61.1% Number of pips won: 62,911.3 Number of pips lost: 32,347.9 Win to loss ratio: 1.94 to 1 With a 800 pip stop-loss Number of wins: 218 Number of losses 132 Percentage of winning trades: 62.3% Number of pips won: 64,504.3 Number of pips lost: 29,576.2 Win to loss ratio: 2.18 to 1 With a 1000 pip stop-loss Number of wins: 219 Number of losses: 131 Percentage of winning trades: 62.6% Number of pips won: 64,836.3 Number of pips lost: 28,718.7 Win to loss ratio: 2.26 to 1 With a 1200 pip stop-loss Number of wins: 219 Number of losses: 131 Percentage of winning trades: 62.6% Number of pips won: 64,836.3 Number of pips lost: 28,918.7 Win to loss ratio: 2.24 to 1 With a 1400 pip stop-loss Number of wins: 219 Number of losses: 131 Percentage of winning trades: 62.6% Number of pips won: 64,836.3 Number of pips lost: 29,118.7 Win to loss ratio: 2.23 to 1 With a 1600 pip stop-loss Number of wins: 219 Number of losses: 131 Percentage of winning trades: 62.6% Number of pips won: 64,836.3 Number of pips lost: 29,318.7 Win to loss ratio: 2.21 to 1

To Sum Up

It's very tempting to tighten your stop loss, as most people fear risk. Test your system with a wide array of stops and you'll soon discover whether your system benefits from a tight or loose stop. If you find that widening your stop is the way to go, then it's wise to reduce your position in the market to keep your money management in check.
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Using a stop-loss of any size (other than a very, very large one) almost always degrades the performance of any trading system. It's true that a good trade rarely moves to far against you, but I find that almost all the advice I read severely underestimates just how 'far against you' the price can go before it should be considered 'to far'.