Stop beyond an M1 swing or an M15 swing: same entry, lot sizes and the win rate each needs

[Fairman]

Stop beyond an M1 swing or an M15 swing: same entry, lot sizes and the win rate each needs

Take one long on EURUSD at 1.0850 on a $10,000 account, risking 1% or $100. The only thing that changes is where the stop sits.

Stop A goes under the last M1 swing low, 4 pips away. Lot size is 100 / (4 x 10) = 2.5 lots. Stop B goes under the M15 swing low, 14 pips away, so the size is 100 / (14 x 10) = 0.71 lots. The dollar risk is the same either way, which is the whole idea of sizing from the stop.

Give each a 1.5R target, so 6 pips for A and 21 pips for B, and use a 0.8 pip spread. On A the spread costs 2.5 x 0.8 x $10 = $20, which is 0.20R. On B it costs 0.71 x 0.8 x $10 = $5.68, or 0.06R. If the cost per trade is c in R, the break-even win rate at 1.5R is (1 + c) / 2.5. That gives 48.0% for A and 42.3% for B. The tight stop starts nearly six points behind before price has moved.

None of that counts noise. A 4 pip stop can sit inside the range of one ordinary M1 bar, so the win rate you actually get on A is more likely to be lower than B's than equal to it. B also needs 21 pips of travel, which can take an hour or two instead of a few minutes.

Neither stop is correct in general. The sums only say the tight one has to earn its place with a clearly better hit rate, and that is something to log, both versions of the same setup, for around 50 trades before committing size.

[Fairman]

A small refinement is to add the spread to the M1 stop for longs, since a long stop triggers on the bid while you entered on the ask. Make A 4.8 pips instead of 4. Lots become 100 / (4.8 x 10) = 2.08, the spread cost is 2.08 x 0.8 x $10 = $16.67 or 0.17R, and the break-even win rate drops to 1.167 / 2.5 = 46.7%. It's a better stop for the same level, but it's still four points above B. The buffer costs nothing in dollars of risk, only in lot size.

[Fairman]

There's a hybrid that uses both charts. Find the zone on M15, keep the M15 stop, and take the entry from an M1 trigger inside the zone. Say the M1 trigger fills 3 pips better than a market order at the first touch. The stop is now 11 pips away, the target 24 pips from the new entry, so the reward is 24 / 11 = 2.18R. Lots are 100 / 110 = 0.91 and the spread cost is 0.07R. Break-even win rate is 1.073 / 3.18 = 33.7%. The cost is that M1 triggers inside a zone don't always come, so you miss some trades, and that missing share should be counted before calling this free.

[Fairman]

To compare the two stops on your own history, mark each trade with the adverse excursion, meaning the furthest price went against you before the target or the end of the trade. Then ask two questions. How many trades went more than 4 pips against you, and how many went more than 14? If 31 of 50 went beyond 4 pips but only 9 beyond 14, the M1 stop would have taken 31 stops where the M15 stop took 9. The M1 version then has to win nearly all the rest to compete. You don't need a platform for this. A spreadsheet column with the worst drawdown per trade, in pips, is enough to count both numbers in a minute.

[Fairman]

Slippage hurts the tight stop more, because the same pip error is a bigger share of the risk. A 2 pip slip on A, at 2.5 lots, adds 2 x 2.5 x $10 = $50, so the $100 plan becomes $150, or 1.5R lost. The same 2 pip slip on B, at 0.71 lots, adds $14.20, so $114, or 1.14R. Over a hundred stops the difference is considerable. This doesn't make B better. It means that if you trade A you should budget for fills worse than the stop, perhaps by sizing for a 5.5 pip stop while still placing it at 4, and see what that does to the lot size.