I have grown to much prefer using an indicator to tell me when to get out of a trade – or even something as simple as ‘I’m in profit, it has been a few days and there hasn’t been much movement – get out while I’m ahead!’
Interestingly the same podcast tested ATR based stops and found that ATR * 3 was actually quite an effective stop. Obviously this was one test on one strategy on one day so you can only read so much into it.
I’m just not a big fan of stops. When the DAX fell massively in one day a little while back my 800 pip emergency stop got hit on one strategy. Sods law it went down about another 100 pips and then bounced right back up again. If I had had no stop it would have been far better for my bank account.
With risk reward ratios you have to understand that every time you place for example a coin toss trade with 1:1 ratio you will win 50% and lose 50% except you won’t because the spread puts the balance in the favour of losing. You can change the risk reward ratio up or down however you like but it will not change the fact that the spread is against you. Your strategy has to have enough edge to over come the forces against you and just changing risk reward ratio will not fix a strategy with no edge.
