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Listen to “How to Use Stop Loss in Trading” on Spreaker.

Hi, guys. Hi from Andrea Unger. “No stop loss” is better.

Now, I don’t say this. Sometimes you read it. You read it on the forum or you listen to it in some places where traders discuss. What’s behind it? What does it mean? And is it true, no stop loss is better? Let’s go back to the 70s. I was there, but I was born—I was not a trader yet, even strategies, classical strategies worked; channel breakout, we got prices moving up and down, we took the highest high over a number of periods, lowest low and we were entering long or short at those levels—channel breakout. And this strategy was actually just a stop and reverse. Long here, short here, breaks down there and so on.

So, these strategies were always in the market. A long position was closed when the short condition was met, and the short position was immediately open. Today, we have software; we can test this. And if we take a strategy and we apply it to a market where it still works, we’ll get a nice performance. But we then try to add a stop loss to the strategy. And actually, most of the times, you will get worse performance. Smaller net-profit, less money made, disappointed.

So actually, you think about those guys and say, “Oh they were right. No stop loss is better.” But what is the point here? Are we really trading without a stop loss, or is it hidden somewhere? It is hidden. Think about that. You have a long position. At a certain point, you close the long position because you open a short position. So actually, you have a rule in your system that tells you when you have to close your open position. The rule, in this case, is simply the opposite end, but it’s a rule. You have a specific rule that tells you when to close a position, regardless if it is in profit or in loss—you have a rule. You do have a rule, and you need rules.

Another case is, let’s take a BIAS strategy that opens a trade at 10 and closes at 5 PM—just an example with round-up numbers. You have a rule that at 5 PM it’s telling you to close that position. It doesn’t matter, if you’re in positive, stationary, or if you’re losing. It’s telling you to close the position. So, you have a time stop in your system; you still have another kind of stop. You never keep a position open hoping to see profits again. You don’t hope. You have rules, and these rules do not necessarily have to be the classic fixed-dollar amount stop or percentage-amount stop. There are different ways to close or open positions, but there are rules to do so. So, can I have a fixed-amount, dollar-amount stop, a percentage-amount stop, a time stop, a reverse stop? You can name many kinds of exits. Important is that you have the rules in place, and you follow the rules.

So, the “no stop is better” shall never be interpreted as keeping a position open and hope. Hope is your enemy. You do not have to hope. You might have a position open for 10 years because it goes back into break-even, maybe, and you close it. Your money has been blocked for 10 years—it’s not a great deal, is it? So actually, “no stop” might be better if the stop is the fixed-amount stop. But “no stop,” if it’s intended as “wait and hope,” that’s a disaster. It turns out, sooner or later, it will be a disaster, and it will wipe your account out.

So, always use stops. Use different kinds of stops if you want, but always use rules to close your positions. You need the rules; you have to follow the rules.

Stay tuned. More things to come. Ciao, from Andrea Unger.

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