As I briefly alluded to in my article on exits, I never move my stop to breakeven.
But this wasn’t always the case. When I started trading, I would move my stop to breakeven if my trade reached a certain level of profitability.
When you move your stop to breakeven, you change the potential outcomes of your trades. Here are the three scenarios that might occur:
- Nothing – the price never returns to your breakeven stop so there’s no effective change in your trade.
- You get stopped out at breakeven and the price continues to go against you so your original stop would have been hit too.
- You get stopped out at breakeven but the original stop wouldn’t have been hit and sometimes the price reverses back to profitability without you.
Scenarios 1 and 2 are good – you directly save a little money in 2 and in 1 you create some psychological comfort for yourself.
This is all well and good except when you consider scenario 3. Which is terrible.
Nothing is more frustrating than missing profitable trades.
You’ve done all the work: you’ve researched and meticulously tested a strategy, and now you’re trading it, and you’re missing some of the most profitable trades in the system.
Not only are you missing them, but in this scenario, you’ve guaranteed that you’ll miss more profitable trades than you otherwise would by moving your stop.
It doesn’t take too many trades in scenario 3 to completely overwhelm any benefit you might get from scenarios 1 and 2.
I got stopped out of enough trades that would have been profitable that I had to backtest it.
I tried waiting for X minutes before moving my stop to breakeven.
I tried waiting until the price reached a certain level of profit before moving it.
And what did I find? No combination improved the overall profitability of the system. They all made the system perform worse.
You can, however, improve your win rate a bit by moving your stop a little beyond breakeven.
Remember though – a good win rate might make you feel good, but you shouldn’t be optimizing on that. You get paid by optimizing the total profit of your trading system, not the win rate.