Trading with SL > TP and Adding to Losing Positions? This Actually Makes Sense!

In trading, we’re often told to set tight stop losses (SL) and avoid adding to losing positions. But what if these rules don’t always apply? Let’s explore why setting a stop loss greater than your take profit (TP) and adding to a position that’s moving against you might actually make sense in certain contexts.

Why Set SL ≥ TP?

The SL/TP ratio should be set by the nature of the trading strategy itself, not by rigid rules. For example, when investing in multiple startups with the hope of discovering the next Google, your stop loss (a bankruptcy of any individual start-up) may be much smaller than the potential take profit. You expect small losses on most bets, but one big success can more than make up for it.

In contrast, strategies like arbitrage, where the profit per trade is small but consistent, have an implicit SL greater than the TP. Think about scalpers that worked on micro-movements around the EURCHF peg at 1.20 on the day the Swiss ended the policy and the rate crashed to 0.97 almost immediately. Merger arbitrageurs do not face such extremes, but still typically have more to lose if the deal falls apart than when it comes through as planned. In these cases, the goal is to accumulate many small profits that outweigh the occasional larger loss. The success of the strategy isn’t determined by individual trades but by how the total sum of wins compares to losses over time. This risk profile is also common in fixed-income investing, where investors earn modest interest but face the risk of large losses from defaults – even though many such investors do not think in terms of an SL just considering their bonds ‘safe’.

If you’re running a swing-trading strategy in stocks or FX and set your TP to 3x your SL simply "because the book says so," you may have no idea of what your strategy is supposed to do. From my experience in algorithmic trading, it often makes more sense to set your TP equal to your SL. This makes it easier to analyze the results of backtesting using statistical methods. For example, if an SL=TP strategy generates 100 trades with a consistent profit curve, it’s a strong signal of robustness. However, if a big-TP-tight-SL strategy produces the same profit but only thanks to a few large wins, there’s a good chance that those results are coincidental rather than indicative of a solid trading edge. Think about two gamblers, one of whom has constructed an unfair coin (TP=SL) and the other tweaked the chances of winning a lottery jackpot (TP is much larger than SL), so that they have the same mathematical expectation of winning. The first gambler would likely have a good idea if the coin works as expected after a few hundred flips, while the second would still have too little data after purchasing the same number of lottery tickets.

When to Add to Losing Positions

Adding to a losing position can be a smart move in specific situations, particularly when you believe the market is experiencing an irrational extreme—either panic selling or an unsustainable bubble. In these cases, you want to bet against the momentum-driven market, but timing the reversal is tricky. Acting too conservatively might mean you miss out, watching in frustration as the market moves in the direction you anticipated without your position benefiting. On the other hand, acting too quickly might leave you holding a losing position for an extended period. A prudent approach is to set up a ladder of orders that gradually add to your position as the market moves further against you. This way, you avoid overcommitting at the wrong time, and your return profile becomes smoother, covering a wide range of possible market turning points.

Another scenario where this approach makes sense is when trading through a broker that does not pay interest on the account balance. If you open a margin or short position and have a large stop loss in mind, it can be wise to initially invest only a portion of your capital. You can keep the rest in an interest-earning instrument and ‘roll’ the position, adding to it only if losses materialize. This allows you to benefit from interest on your unused capital while keeping your risk under control.

Said that, I find it important to note that adding to losing positions should never be done out of desperation or an inability to admit a mistake. The examples above imply that you have a pre-established plan of action, turning what might look like a risky strategy into a well-thought-out trade management approach. These are not erratic attempts to salvage a bad trade but are part of a single trade strategy with multiple entries. Crucially, this type of strategy includes an ultimate SL defined at the inception of the trade series, which triggers when the market defies your expectations—whether what you thought was a bubble turns out to be a genuine bull trend based on solid fundamentals or the market remains irrational longer than anticipated.