Why a wider stop sometimes reduces risk

[Shadow Trader]

It sounds backwards. A 10 pip stop risks more than a 5 pip stop. But risk is not the stop distance alone. It is stop distance multiplied by position size.

A trader risking 1 percent with a 5 pip stop takes a larger position than one risking 1 percent with a 10 pip stop. The larger position is more sensitive to spread, slippage and a sudden spike. Many 5 pip stops sit inside normal market noise and get hit by random movement before the trade has a chance to work.

A wider stop with proportionally smaller size can give the idea room to breathe. Win rate often rises, since fewer trades are stopped out by noise, and the cost of spread becomes a smaller share of the risk.

The tradeoff is that the target must scale as well, or the risk to reward ratio worsens.

Backtesting both versions with equal dollar risk reveals which is more efficient.

Has anyone compared stop distances while holding dollar risk constant, and what came out ahead?