Problems of Trading Forex using Large Stop-losses

The central idea behind trading with large stop-losses is to achieve a very strong win:loss ratio which will then offset the poor risk:reward one. For instance, if you are able to achieve 11 wins of 50 pips against 1 loss of 500 pips, then you would have realised a profit of 50 pips.

However, although this sounds good, this technique must be performed in the correct way. This is because if you are not careful then your trades could get marooned in negative territory. The market price could then stay within this region for lengthy periods of time e.g. months. If this were to happen, you would be denied any possibility of registering a profit during this time.

To solve this problem and similar ones, you need to use a very good money management strategy. In this case, you would be well advised to risk only 0.10% to 0.25% of your entire available budget on any one trade. By doing this, you provide yourself with a defense to preserve the majority of your account should your 500 pip stop be hit. In addition, you will have the luxury of allowing a few trades to become marooned for some time whilst waiting for them to drop back into profitable territory. Also by risking so little you will be able to open a number of trades at the same time.

The great advantage of this trading method is that it allows novices room to make mistakes which they would not enjoy if they continuously utilized small stops of 30 pips per trade. In response, you may say that gaining 30 to 50 pip profits is very small and as such would have a limited positive effect on your budget. However, you would be wrong in doing so. You need to realise that a successive number of wins enables you to achieve an exponential monetary growth even if your targets are a small percentage of your budget.

Another problem that arises is when beginners, who are first exposed to this concept, asked why they cannot risk a larger percentage of their budget e.g. 10%. They think that they should be able to do this because they are using such a large stop.

However, this is definitely not a good idea especially when you realise that 10 successive losses using 10% risk per trade would consume about 66% of your entire budget.

In contrast, risking only 2.0% per trade would lose only about 18% of your total budget. Clearly, the second case is far more desirable because it extends your trading life by providing more protection for your budget.