The phrase “do not use stops when trading forex” is a controversial one that has divided traders for years. Some believe that using stops is essential to protect against large losses, while others argue that stops can be unreliable and lead to unnecessary losses. In this article, we will explore both sides of the argument and examine the reasons why some traders choose not to use stops.
Firstly, it is important to understand what a stop is and how it works. A stop is an order placed with a broker to sell a currency pair when it reaches a certain price. The purpose of a stop is to limit losses by closing out a trade before it falls too far. For example, if a trader buys the EUR/USD pair at 1.2000 and sets a stop at 1.1950, the trade will automatically close if the pair falls to 1.1950 or below.
The main argument against using stops is that they can be unreliable. In fast-moving markets, prices can quickly jump past a stop level, resulting in a larger loss than anticipated. This is known as slippage, and it can occur when the market is volatile, or when there is low liquidity. Additionally, stops can be vulnerable to manipulation by banks and other large traders who have the power to move the market in their favor.
Another reason why some traders choose not to use stops is that they believe that they can manage their trades better without them. These traders rely on their own analysis and judgment to determine when to exit trades, rather than relying on a pre-determined stop level. This approach requires a high level of skill and experience, as traders must be able to read the market and make quick decisions based on changing conditions.
One strategy that some traders use instead of stops is to hedge their positions. Hedging involves placing a trade in the opposite direction to the original trade, with the aim of reducing losses if the market moves against the original position. For example, if a trader buys the EUR/USD pair and the market starts to fall, they could place a sell order on the same pair, which would offset some of the losses from the original trade. However, hedging can be complex and requires a high level of skill to execute effectively.
Despite the arguments against using stops, many traders still believe that they are an essential part of risk management when trading forex. Stops can help to limit losses and protect against unexpected market movements. Additionally, modern trading platforms and brokers offer advanced order types that can help to reduce slippage and minimize the risks associated with stops.
In conclusion, the decision to use stops when trading forex depends on individual preferences and trading styles. While some traders choose not to use stops due to concerns about reliability and manipulation, others believe that they are an essential tool for managing risk. Ultimately, it is up to each trader to decide which approach works best for them, based on their own experience and analysis of the market.
