Market Volatility and Stop Placement

Directional price burst is the swing traders friend.  Non-directional and/or choppy price action is a swing traders nemesis. Volatile price action marked by wide intraday swings and gaps against positions is a swing traders potential downfall.  One can often determine the later period when well intentioned traders offer the following advice:  "Trade small or not at all", or "If you're going to trade this market widen stops."  Is widening stops a viable strategy when there is an increase in volatility or is it dubious and best to avoid?  

Suppose there is a hypothetical trader with the following stats.  Said trader has an average stop of 6% from entry with an average gain of 12% and a 55% win rate.  Over a series of 10 trades the expectation is $650 per trade.

Trader Stats

Now suppose said trader adjust their stops to account for loosening price action.

Widen Stop

Simply adjusting the stop by an additional .40 results is a decrease in profit per trade of $440.  It cannot be assumed that this trader who has a history of 12% gains on a trade by trade basis will suddenly turn them into 20% thus balancing out for the wider stop.  However, it can be and should be assumed  that the win percentage will not remain the same.  Adjusting this as follows and suddenly a profitable trader is a losing trader.

Widen Stops/Decrease Win %

But, this is actually factoring in the best case scenario.  What if there were a string of losses greater over the next ten trades instead of an on average series of gains/losses?  When plugging these numbers into a risk of ruin simulator, over the next series of ten trades, said trader has increased the probability of a 5% draw down significantly.

For swing traders, the current market conditions can be summed up as follows.

When market conditions become like firing into a hurricane, it's safe and sane to step aside and stop trading.  Widening stops will likely lead to losses of hard earned gains and/or underlying capital.