Forex Stop-loss & argets

Is a Stop Loss Always Necessary?

Do you really need a stop loss? The quick answer is, yes. The longer answer is yes if you choose not to exploit your Forex trading account. There are many reasons to use a loss limit, but there are some strategies that can be implemented to give up a stop loss, although it is usually the domain of institutional traders to do things like that.

Stop Loss is your Best Friend

Stop loss is your best friend, as volatility in Forex markets can increase at any time. There may be a surprise announcement, some events around the world, or, worse, something is happening while you’re asleep. He just can’t predict everything that’s going to happen, so the end of the loss is his guardian angel. As for Forex markets, there are a multitude of reasons why you might see a sudden rise in price.

Let’s take an example, in recent years we have watched the Swiss National Bank defend the level of 1.20 in the EUR/CHF pair, refusing to allow the pair to fall below that level as the Swiss franc had become too expensive. However, on 15 January 2005, the SNB suddenly abandoned parity and allowed the market to fall, as it had been protecting that level for a couple of years and had finally become too expensive.

Large amounts of institutional money were going in and buying the pair every time it approached the level of 1.20 because it was “easy money”. However, as soon as the Swiss moved away from the Forex markets, the pair collapsed and several candles fell in milliseconds. Around the world, there were stories of retailers who had rejected the common sense of putting up a stop loss and were eliminated.

Stop Loss Example

Think now of an American merchant. You have a position in the EUR/USD pair putting your trust in the Swiss National Bank to protect it. Suddenly, when he wakes up on January 15, he discovers that his account is empty. His agent is demanding that he deposit more margin, and for some people, it was even worse than that: they actually owed their agents money because the orders could be filled quickly enough.

Of course, this is a very extreme situation, but it is not strange that a pair like the EUR/JPY drops 100 pips in your sleep. Some people use stop loss as a “disaster stop”, but they are designed to protect you when your analysis is not correct, and let’s be honest: incorrect analysis is simply part of the game.

Stop Loss Exists for a Reason

Not only are there losses to protect your account against disasters, but it also represents a “line in the sand” where it is verified that your analysis is incorrect. If it proves wrong, you just walk off the market and realize you’re living to fight another day. Unfortunately, many of you will be moving stop losses to avoid taking losses, but the successful trader is willing to reduce losses quite quickly. Ultimately, the successful trader understands that if his analysis proves incorrect, it is better to keep his losses very small. However, if it is shown that your analysis is correct, moving your loss limit is in your favor to ensure profits is a perfectly acceptable strategy. This allows the market to tell you when it’s time to leave after a big, higher race.

Other Strategies

Institutional traders often use options to protect themselves against currency fluctuations, but sometimes that gets complicated. Most retailers will receive better service by simply accepting a loss as soon as it appears and they move on with their lives.

For example, if your loss is 1% of your account, it is not a big disaster. However, if you don’t use a loss limit and simply use a strategy of hope, you may discover that you are so low that you can never get that money back.

To use the options of the strategy, quite often if a trader goes long on the EUR/USD pair, he will buy a spot simultaneously, with the idea of at least recovering part of the losses if the trade goes against him in the Forex spot market. Otherwise, if the trade works, the option expires without value. However, there are many other factors in the choices that make it much harder and slower to figure out how to protect yourself by ticking.

Depending on where you live, you can direct your trade with the same broker if you trade in the opposite direction. However, usually, this is a scenario in which you limit the amount of profit you can get because one of those trades will be absolutely a loss. This has nothing to do with having a loss of stop in a trade that works for you because theoretically, the profit potential has a limit.

It is not advisable to trade without a stop loss. You should never trade without a stop loss under any circumstances. There are too many reasons why you could lose a lot of money. Of course, some of the points I’ve been making in this article are a little extreme, but at the end of the day, you never know when something is going to happen. Beyond that, it’s a way to force your account to neutral again if the trade doesn’t work. You can also use it as a way to make a profit if the market backs down after a big move in your favor.

The Forex world is full of bodies of people who thought they were smarter than the market and couldn’t bother to suffer a loss. There is no such thing as a “100% successful strategy,” apart from limiting your losses and expanding your profits. Losses come independently, so protecting yourself is all you can do.

Beginners Forex Education Forex Stop-loss & argets

How to Set a Maximum Loss Size

When you have made a loss or a couple of losses in a day, it is easy to want to trade more in order to try and get some back, but what would happen if they also ended up losing? Would you be willing to risk the entire bank account balance just to make back a few of your losses?

Whether you are new to trading or have been trading for years, I am sure that you have been told how important risk management is, normally people refer to it in regards to a single trade, but it is also relevant when looking at your account as a whole, this can be broken down into months, weekends, days, trades and any other increment.

There will be times that your trades go the wrong way, maybe your fault, maybe there was an unannounced news event, this is inevitable. What is important is that you take steps in order to help protect your account from these events and moves, this is why it can be important to set something that we call a daily maximum loss.

So what is the daily maximum loss, well it is a figure, either monetary or percentage that is the hard stop level for our trading, if you hit this level then you need to step away from your trading platform, take a break and then come back tomorrow with a fresh head. When you are incurring losses, you start to get into a psychological battle with yourself, so stopping and stepping away is a method of resetting that battle in your head.

Having a bad day isn’t something to worry about, it is something that everyone, even the very best suffer from. What is important is how you deal with those bad days.

So how would you set these goals? There is no set way to do it, each of us will have a different approach and each of us will have a different ability to deal with risk, so it is up to you, but here are a few suggestions to give you ideas.

Use a percentage to gauge your losses for the day, gives yourself a set amount, maybe 2% of the account or 5% depending on you and your strategy, as soon as your account hits that percentage, stop and walk away.

A monetary amount, this will depend on your account and can also make the losses seems more real, if you have a $10,000 account, set your maximum daily loss to $500 or $300 whichever you feel is best for you, once that amount is hit, take a break and come back tomorrow.

One way to work out percentages is to base it on your average gain. Would you be willing to lose one day worth of winnings or would you want to lose less, if your average gain is 1%, then set your maximum daily loss at 1% or 0.5% depending on your own thoughts.

You could also set this amount via a longer period of time, give yourself a max loss of 10% per month, this can then be divided down into days, so if every day you lost to your limit, you would only be 10% down.

Set a maximum number of losses, instead of looking at percentages or monetary values, you could set yourself limits based on trades, this is a little risky as it can still result in high losses (although you should have stop losses in place), but if you set yourself to two or three losing trades in a day, then stop and move away until tomorrow.

It is important that you come up with something of your own that you know you will be able to adhere to,m there are a lot of dangers to not following a maximum loss plan, mainly that it can put your account in danger as you go back into winning back mode or through desperation to either make your money back or to simply have a winning trade to end the day.

It is important to stop and walk away fro the day, this could give you the opportunity to properly analyze the trades that you have made to find out why they have lost, or to simply sit down and relax for the rest of the day, taking your mind away from the stresses of trading.

Just remember, protecting your account is the number one key to successful trading, not only will it protect your equity, but it will also help to protect your mind from the stresses of loss.