Hi Guys. Hi from Andrea Unger.
I answered these days to a post in the Unger Academy forum where again, a question came up about the stop loss and the question was more or less: is it better to use a fixed dollar amount stop or is it better to use a percentage stop?
So that it is proportional to the price of the underlying at that moment. Common sense and also some gurus in literature say that a percentage stop is better because it adapts to the situation of the moment.
On let’s say forex, Eur/USD pair, you had a period where it was quoting less than one and there has been a period where it was one point five. So obviously there was a huge difference, and the claims are that a percentage stop would have been better adapting to the situation when it was quoting one or when it was one point five.
And this makes absolute sense. It is common sense. And, it’s hard to believe that it could be different, but the reality I discovered, or at least my reality sounds different. All the tests I run show that in my strategies, a fixed dollar stop, works better than a percentage stop.
So to work with a fixed stop of 60, 70, normally I use even 100 pips on Eur/USD, shows overall better results than a percentage stop. Also on futures, for example, the mini S&P 500 a 14 point stop $700 looks better than a percentage stop in spite of the fact that there was a period, a decade ago when the market was quoting less than 1000 and now it’s close to 3000.
So again, this is against common sense, but as a matter of fact, a fixed stop shows better results. Why? Wait, there is obviously not a specific answer.
My personal opinion is that I believe that traders all over the world have an easier life in working with fixed amounts rather than percentages. I don’t mean they are stupid, so they are not able to calculate percentages. I simply mean that they are accustomed to a certain way of measuring and this reflects on the habits. Not only on stops on Eur/USD as I mentioned this before. I can tell you that a common filter is on intraday to wait for the market on the current session to make at least a certain amount of pips from high and low of the day before taking action because less than that would mean nothing. And normally I found out that 40 pips are a good compromise.
So you wait until the market moves at least for 40 pips from the low of the day to the high of the day before placing breakout orders for example.
And again, I thought that these 40 pips could lead to a better result if I used a percentage value of the range or the average range of the last end session.
It didn’t, 40 pips were still the best result.
So the question: fixed stop or percentage stop? The answer from my point of view and from the results of my investigations is: fixed stop is better than a percentage stop.
This is it for today, see you next time, ciao from Andrea Unger.