The Breakeven Stop Loss
by Trader Rich
I am interested in the subject of Breakeven Stop Losses because when a trade goes my way, I typically will move the stop loss to breakeven so that there is no longer any risk to me. Typically what I find happens is that my stop loss gets hit and I don't win anything and don't lose anything. Is this a good thing? Not at all.
There may be a pretty good reason why this happens to me. I think it is because I'm selecting an arbitrary pip target. For example, after an open position goes 20 pips in my favor, I move the stop loss to break even. Since I used technical analysis to enter the position, to determine my limit and initial stop loss, I should also use technical analysis to determine my break even. I'm not doing this. In addition, I'm only trading 1 lot at a time. Typically traders will use breakeven stops in conjunction with an exit of some portion of their multi-lot position. So if I had entered a position with 2 lots, I may close 1 position at a 20 pips target and then moved the last lot to breakeven. That way I would at least make 20 pips on the trade if the price moves against my last position and stops out at breakeven. I should also mention that I recently read somewhere (I forget) that you are destined to lose if you only trade 1 lot at a time. I may look into this more and make it a future post. The problem is if you have limited initial capital to trade, you may not have an option to trade multiple lots. Most would say then don't trade at all and wait until you have enough capital to trade in multiple lots.
I don't know if this is the problem or not so I decided to get out there and search for some opinions of other traders regarding a breakeven stop. Here are some of the things I've found.
- Joe Duffy from futuresource.com does not use breakeven stops because he states that typically it creates too tight of a stop loss. His experience tells him to move the stop as the trade becomes profitable but not all the way to breakeven.
- Davide123 a senior member from the Forex Factory Forum states: "You see, tight stops of the magnitude being discussed here make no
sense to me in a market with such a wide trading range. I don't think
you can make consistent profits, and therefore a living out of trading
fx, unless you rearrange the way you think about the whole business and
give your trades enough space by putting your stops at strategic places
and leaving them alone to get hit if that happens to be the case. The
trick, IMO, is to cut down on the number of times you think you have to
win, and increase your tolerance for the frequency of losses (within an
acceptable level drawdown, of course)."
- Tradenexus.com states that a breakeven stop should be placed once the price crosses a "transition point" which was part of the Turtles trading technique.
- A lot of what I read about breakeven stops are related to multi-lot strategies. IE: When you have reached your first profit target, close out half the position and move the remaining to breakeven.
I think the point here is that I'm trading not to lose instead of trading to win. As previously stated, trading 1 lot also makes it very difficult if not impossible to have any exit strategy other than closing your position once your target is hit.