🚨Opening Playbook is live at 10:30 a.m. ET🚨
We’ll look past the market noise to hunt for tradeable gap opportunities right off the open [tap to join us for Opening Playbook]
You know what drives me crazy?
When traders take a strategy that’s actually working — or at least not hemorrhaging money — and destroy it trying to make it “better.”
I see it all the time. Someone has a promising setup, then decides to add stop losses for protection.
Sounds reasonable, right?
Except when I run the numbers, those stops often turn profitable or break-even strategies into disasters.
I recently backtested a bullish-only strategy on the S&P 500 (SPY) using options with 30 days to expiration. It had a 66% win rate and lost $5,000 over four years — about 1% annually.
The obvious problem was the risk-to-reward ratio. The average loser was $26 while the average winner was $14.
That’s where everyone wants to jump in and “fix” it.
The Stop Loss Disaster
I tested a 50% stop loss to reduce those losers. Instead, it created more losing trades and hurt the winners.
Why?
Because the stop took time away from the strategy. It made it easier for normal market movement to knock positions out, turning a nearly break-even approach into one with a straight-down equity curve.
Then I tested a tight 10% stop. That finally produced the one-to-one risk-to-reward ratio everyone thinks is so important — but the strategy still performed terribly.
A wide stop was bad. A tight stop was just as bad.
This is why risk-to-reward can’t be judged in isolation. A smaller average loss looks attractive, but not if achieving it creates far more losses or prevents trades from reaching their full potential.
When I gave the trades more time, they had more opportunities to recover from ordinary pullbacks — and the strategy made more money.
Time is one of the best filters and leverage points available. Traders often reach for another trend indicator, but indicators can’t give a position room to work. Time can.
A Better Way to Control Risk
Stop losses fight how markets actually move. Even in bullish trends, markets oscillate, pull back and test support. A rigid stop can shake you out during those normal moves right before the position recovers.
That doesn’t mean ignoring risk. It means managing risk at the portfolio level instead of forcing every trade into an arbitrary stop.
Position sizing and total exposure can be more useful levers. For example, allocating 3% per trade and limiting the portfolio to 20 open positions creates defined exposure without constantly interrupting individual trades.
Those numbers aren’t universal — allocation should adapt to the strategy, account size and market conditions.
So before adding a stop loss, test what it actually does to win rate, average profit, total returns and drawdowns. Then test whether more time or smaller position sizes improve the outcome.
Ask yourself: Am I protecting my capital, or am I giving the market an easy way to take my money?
Now don’t forget to join us at 10:30 a.m. ET weekdays for Opening Playbook, and at 3:30 p.m. ET Closing Playbook!
Nate Tucci
Tucci Trades
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*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
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