Tight stops mean more trades, and more trades mean more spread

[Fairman]

Tight stops mean more trades, and more trades mean more spread

A tighter stop looks like better risk control. It also changes the rate at which trades get stopped and replaced.

Each new trade costs a spread. A strategy that uses a 3 pip stop and gets stopped out often will generate many more trades than one with a 10 pip stop, and the cumulative cost of spread and commission rises with it.

A short example: a strategy with 100 trades per day and a cost of 0.8 pips per trade pays 80 pips daily just to participate. If the average edge per trade is below 0.8, the result is a steady loss, hidden by the volume.

That is why many scalpers who tighten stops see their results get worse, even if each loss is smaller. The frequency of losses increases, and the costs accumulate.

The test is measuring net expectancy per trade after costs for different stop sizes. The optimum is often wider than expected.

A neat chart is net expectancy per trade against stop size, drawn from the log. It usually forms a hump, and the top of the hump is not at the tightest setting.

Has tightening a stop ever made the results worse instead of better?