STOP LOSS > TAKE PROFIT

13 Jan 2022

Hello everybody!
Today I want to discuss with you a question concerning risk management – Is it possible to set a stop loss more than a take profit?

History says…
Historically, traders have a rule according to which a stop loss should not be more than a take profit. There is a logic in this, if you receive more losses than profits, sooner or later your account will disappear.
But time goes by and the market is changing and already today it correctly seems not so ideal.

Every trader should understand that after a large number of trades, the expectation should be positive.
The expectation formula is as follows:
(Average profit value * ratio of profitable positions) – (average loss value * ratio of unprofitable positions) - transaction costs.
In order not to bother with calculations, traders have created a table that simply and clearly shows what a positive expectation is.

According to the table, if only 20% of the total number of your trades are profitable, then the RISK ratio is/The PROFIT should be 5:1 and higher.
If there are 50% profitable trades, then the ratio may be 2:1, and if there are 60% profitable trades, then the stop loss may be even greater than the take profit.

Therefore, the main rule that a trader should follow is that the smaller the take profit, the higher the win rate should be.

The difference in the markets

It is worth remembering that 80% of the books where these tips on the ratio of risk to profit come from are written about the stock market, which is more inclined to rise than to fall.
On the other hand, currency pairs tend to average.
This is the main difference: in the forex market, if the stop is large, you can sit out the fluctuations, if the take is large– you can not wait for it to work out.
You need to understand when and where to use large take profit and stop loss based on the strategy and the market.
And not because you multiplied the stop loss by 10.

Conclusions
The conclusion may be unexpected for you, but the profit/risk ratio is not an unbreakable rule.
Always adhere to the rule of positive expectation.
Set a stop loss and take profit based on the strategy and the market in which you are trading.