The Joy of Trading Without a Stoploss

March 21st, 2018

Never losing is a beautiful thing.

I know losing is where the learning is and failure is necessary. I know all that.

But losing sucks.

Winning streaks are magnificent, though.

When my tennis students went on 50-match winning streaks, I never sat around and wished for it to end. When my favorite sports teams go on a run, I never root for a loss.

And when my trading partner and I won over 50 trades in a row back in 2010, running my account up 50% in about three months, we never once turned to each other and pined for a good old-fashioned stopout.

I know losing is unavoidably essential.

I still want to avoid it like the plague.

Which is why I look back on that period in 2010 with fondness and joy. What a great time that was.

And do you know the style of trading we were doing?

We were buying things on sale without stoplosses.

We’d wait for a Forex pair to drop into an extreme oversold zone, and then we’d buy it. The “Fair Value” of that currency pair was way above current price, so the chances of that pair going our way for a small gain were very high.

So high, in fact, that we never lost a series of trades for three months. The size of our account shot straight up with no backpedaling whatsoever.

But not every trade could have gone perfectly. What happened when price kept dropping?

Good question.

If price dropped more, we would buy more. And once we got into profit, we got out.

But what if you bought more and it still kept dropping?

Then we waited a little longer and bought even more. And once we got into profit, we got out.

Okay, but what if it still kept dropping?

Well, that’s the problem.

Without an iron-clad plan for emergency situations, things can get very ugly.

What does ugly mean?

Ugly is no longer going into REM sleep because you’re listening so hard for a target alarm to go off on your computer.

Ugly is seeing a drawdown so uncomfortable that you stop talking to your partner because both of you don’t have the words.

Of course, if that scary trade somehow works out (as ours did), the feeling is euphoric. I can still feel the happy weakness in my knees from when that trade closed out.

One one side, when you trade without stoplosses, the winning comes easy and often. There’s no system that can match the good times of trading without a stop.

But on the other side, trading without stoplosses can ruin your whole account or take forever to close out.

What’s the difference between those two scenarios? Trade size.

If your trade size is large, the winning is amazing but the losing can make you lose everything.

If your trade size is small and reasonable, it won’t take your whole account, but it can take forever to get back into profit.

And this is exactly what just happened on a (kind of) recent USDCAD Fair Value trade.

Using the rules of the Fair Value system (you can find that system here), a series of long trades were taken by the robot back in June, 2017.

The trades got into trouble pretty quickly when the USDCAD dropped at a historic rate but then recovered pretty quickly. Using a discretionary “get out of trouble” method, it was possible to have gotten out of those trades quicker and gone back to business-as-usual.

But who really knows how to “get out of trouble” and who wants to? Adding positions to losing trades is the perfect way to lose all our money. Why risk it?

By doing nothing, all we could do is watch the USDCAD trade creep up near our entry–but then it sank back down even worse. And it stayed there for a long time.

Until 3/16/18.

On March 16, the USDCAD shot up and closed out all the trades for a profit. The long journey was over.

Yes, it took a long time to finish, but the account was never in danger (if we stayed with the recommended trade size). And the other currency pairs kept chugging along making money in the interim (if we traded the entire Fair Value portfolio).

You can see the results of the entire Fair Value portfolio (including the USDCAD ordeal) here: https://www.scottwelsh.me/fair-value-traders-page/.

The takeaway is this: trading any system without stoplosses is the best way to make money trading when things are good.

If you never lose–guess what?–your account gets bigger and bigger!

The problem with trading without stops is that a trade size that’s too big can put our account in peril. And so can not having a plan for when things go wrong.

A big trade size and panic is a recipe for disaster.

That’s the danger.

In tomorrow’s Youtube video, we’ll talk more about this USDCAD trade and how it could have been handled differently for quicker exiting or more profit.

You can subscribe to my YouTube channel by going here.

Hope to see you there.