Trading To Fair Value Without Stops

June 19, 2019

I don’t think I’ll ever stop wanting to trade without stops.

I understand the importance of stoploss. Having a stop makes risk more mathematically manageable.

Plus, it keeps us from harming ourselves by forcing us to exit a bad trade. If we don’t use a stop and get emotional…that story ends badly.

But trading with a stop doesn’t feel like “trading”.

Real traders build positions. Real traders have an idea where they want to go, and slowly get into the market. Then they adjust as price does what it needs to do.

That’s trading, right? Everything else seems kind of dull and thoughtless.

And how about the winning? The most winning I’ve ever done is when we traded a system with no stops. We won over 50 trades in a row with no big problems.

[Actually, that’s not true. We had one big problem, but it worked out okay in the end. Luckily.]

If we don’t use a stop, we win all the time and we get to be traders. We get to use our hard-earned knowledge to create an edge over the market and every other trader. It’s beautiful.

Except when it isn’t.

The elephant in the room in any no-stops discussion is the risk of ruin. If there’s no stoploss to end it, the whole account is potentially in jeopardy.

No-stop trading is glorious until the big drawdown comes around. That’s the moment of truth.

Either we work our way out of that big drawdown and go on to prosper or we lose it all (or most of it all).

There will always be a high-pressure moment if we don’t use stops. A crucial moment where everything is on the line.

Unless we go small.

Going small with our trade size is the antidote to the dangerous drawdown moment.

If we trade small, the drawdown may never reach critical levels. We may never have to make big decisions because the trouble never got out of hand. It’s the way to have our cake and eat it, too.

But you see the problem with this. If we go small, we can’t expect big returns. If we keep it manageable, then we probably can’t make as much as a system with stops–because we can’t leverage up.

Let’s take a quick look at such a system.

I have a Fair Value robot that uses small initial trade sizes (0.1 lots per $6k-$10k account) and enters multiple times if the trade doesn’t go our way. I created it years ago.

The good thing about this system? It still hasn’t lost a series of trades and it still hasn’t blown out any hypothetical accounts.

The bad thing? The returns are steady but not overwhelming.

Here’s a picture of the Performance Report for the Fair Value system on the NZDUSD 15M chart. Report here.

Since 2003, it’s made $2,944 and had a max drawdown of $2,690 (trading 0.1 lots). Not spectacular but extremely steady.

Check out the Equity Curve:

Constantly moving up. Of course, you do get those bad drawdown situations, and we just had one in 2019. The NZDUSD got in a trade in April 2019 and only got out of it in June 2019.

Here’s where that recent trade started:

And here’s how it ended profitably:

That’s a long time to wait for a small profit. But, then again, it did work out and the Equity Curve keeps chugging along.

So that’s the big choice: keep a no-stop system safe from harm and only make small, consistent profits, or trade something else with more potential profit and get stopped out all the time.

Or we could add some other instruments to the NZDUSD and see where that gets us.

We’ll look at trying to increase our returns in our next email.

Talk to you soon.

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Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.