How Viable is Forex Trading Without Stop-Loss Strategy?

In this article, we are not going to provide specific stop loss strategies, but we take a look at general stop loss principles that can help all traders improve how they approach their trading immediately. If you are trading spot which most people do , then there is no reason for why you should ever be in a trade without a stop.

Your stop loss is the place where your idea is proven wrong — and nothing else, although many traders see stops as their enemies.

• How and Where to Place Stop Loss Orders on Your Forex Trades;
• Stop-Loss Orders in Forex Trading.
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Without a stop, it does not really matter how big your position is because your risk will be all over the place. A mental stop loss does not have a single advantage over a hard stop: traders who use mental stops stay in losing trades longer, size positions incorrectly and increase their risk unnecessarily. In Forex trading , many people make the mistake of buying a fixed amount of contracts and then adjusting their stop based on the risk they want to have. Then, their stops end up in random places that absolutely make no sense in the market context.

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How often did you enter a trade and thought the setup looked great and then price went straight to your stop loss before going to your take profit without you? This is the most simplistic example possible. The Elliott Waves Theory is so complex and has so many rules that allow for tighter stops. In fact, Elliott traders have a problem. Yet, the theory gives great trading opportunities. For this reason, it is one of the most popular technical analysis trading theories. Every trader in the world knows that.

Contingent Orders

From those two points, traders project future support and resistance levels. These levels give the stop loss order for a trade. A stop loss may be the invalidation of a count. Or, in this case, the break of a trendline. Therefore, when the trend line gets broken, the bullish trend ceases to exist. Moreover, it means such a break represents the stop loss order.

The natural tendency is to assume that the account takes a loss when a stop loss order gets hit. A Forex stop loss may protect profits. If this happens, the emotional factor disappears. Perhaps the most popular way to use a stop loss order is to trail it. Especially when trading on the bigger time frames.

However, it can be done on lower time frames too. By definition, to trail a stop means to move it when the price moves. The process repeats every time the pair makes a new high. As such, traders accomplish several things. First, they lock in profits. Next, they ride the trend. Finally, they use a disciplined approach to Forex trading.

Forex No Stop-Loss Strategy

Therefore, trailing a stop loss order gives you the means to ride a trend until its completion. Not all traders use the Forex stop loss orders in the same way. It all comes from how traders define a trend and what is stop-loss order for them. The RSI moves between overbought and oversold levels. However, in doing that, it also shows trending conditions. The RSI indicator shows the perfect trending environment in the chart above. Between two oversold levels, the market traveled aggressively. As such, it shows how to put stop loss order.

Or, when to exit a trade. In essence, they represent the same thing. Now that the RSI confirmed a full cycle, traders have two options. One is to exit the trade and book the profits. Another is to raise the stop loss order to the last swing. This way, they protect profits and allow for yet another swing higher. The idea behind a stop loss is to limit the losses. When this happens, traders have bigger chances to survive in the Forex market. Limiting the losses is part of the trading strategy.

Hence, a stop loss gives the exit from a bad trade. Moreover, it keeps the account afloat. The image above shows the state of a trading account. The current open position has no stop loss order set. Nor take profit. One is leverage. Such a level is appropriate. But, if the position turns against the trader, the leverage level will rise. This is a valuable trading strategy that shows a stop loss order example without actually using a Forex stop loss.

The most difficult thing in trading is to be consistent. However, this comes as a sum of many trades. Some of them will fail. For this, a stop loss order comes to help. It is a great tool to define the risk in a market. Or, in a trading account.

Understanding and Applying Stop Losses in FX Trading

If traders can quantify the risk, they have a base to build on. In simple terms, it means that if you are in a long trade, you should strive to place your stop-loss at a point where if the price reaches it, then a long trade would not be viable. Basically, your stop-loss should be placed at a location where if the price reaches it, then the long trade setup has been invalidated, which paves room for short trade setups.

The same is true for short trades where you should place your stop-loss orders at a point which if reached means that the price trend has changed at that the setup no longer favors a short trade but a long trade. Given that this is the first and most important principle when it comes to placing a stop-loss order, you should always consider it first before moving on to other principles and factors. This is the second most important principle when it comes to choosing the location of your stop-loss. Many traders prefer to enter into trades with a risk-reward ratio , which means that for every dollar pip that they risk, they have the chance to make two dollars 2 pips if the trade goes their way.

This is not the only risk-reward ratio that you can use as some trade setups may allow you to go for a risk-reward ratio or a smaller Following this principle, you have to place your stop-loss at a position that will allow you to reach your potential target depending on the trade setup. The same reasoning applies to trades where you target lesser pips, which could affect the position of your stop-loss, in order to maintain your preferred risk-reward ratio. Many traders become fixated on their risk-reward ratios to the point of completely ignoring the first principle of setting your stop-loss at a point where your trade idea will be invalidated if the price hits that level.

You should always try to avoid setting your stop-loss at a short distance in order to increase your risk-reward ratio at the expense of giving your trade enough room to actually go in your favor.

This why it is important to always factor in the percentage of your trading account that you are willing to risk on each trade and then lower or increase the number of lots you trade in order to always stay within your risk limits. However, there is a huge disadvantage to this method of setting your stop-loss as it does not account for the market conditions and the trade setup that you are in. Remember the cardinal rule of setting a stop-loss is to place your stop-loss order at a point where your trade idea will be invalidated.

This is a long-term trade as he is a swing trader who only goes for trade setups that offer a minimum of risk-reward ratio. The current setup has the potential to net pips for Tom, but he will have to risk 50 pips according to his trading plan, which he is comfortable with given that his trade setup would be invalidated if the trade moves against him by 46 pips as there is a strong support level at 45 pips. There are a number of ways you can track volatility in order to place your stop-loss order at a safe distance with the most popular ones involving the use of Bollinger bands and the average true range ATR indicator.

Setting your stop-loss using Bollinger bands is quite simple and effective when your trade setups involve a trading range where the price is mostly stuck within the Bollinger bands. This means that you are taking short trades when the price hits the upper band and taking short trades when the price hits the lower band.

In this scenario, you simply set your stop-loss order a small distance from the point at which you took your trade whether it is a long or short trade. This method allows you to place your stop-loss order based on the trade setup instead of a fixed percentage.