Using Stop Loss in the Forex Trade: Right or Wrong?

Posted by admin 11/09/2013 Comments are off 1087 views

Using Stop Loss in the Forex Trade: Right or Wrong?

A look at the use of stop loss in the Forex trade.

As far as Forex trade debates go, this is among the most hotly contested ones. Individuals on either side of the argument have more than enough points to support them, so they simply refuse to listen to the other group.  We will first of all look at the advantages and disadvantages of both schools of thought.

Advantages of Not Using Stop Loss in the Forex Trade

  • It allows the trade ample time to breathe

So many traders are victims of placing their stop loss too close to the market, and this has usually ended up affecting the profitability of most traders’ strategies. Without using a stop loss, the trade has adequate room to play out. It equally gives trades the ample time to recover from drawdowns.

  • It saves the trader from broker manipulations

This comes in handy when dealing with brokers that have been known to practice stop loss hunting fairly frequently. When there is no stop loss in place, the situation where trades are closed by the broker after going near the stop loss levels without actually touching it will be a moot point.

Disadvantages of Not Using Stop Loss in the Forex Trade

  • It requires trading very small sizes

Most traders that trade in this manner trade in such a way that they can have several losing positions running in hundreds in hope that the market will get back to the entry position one day. This makes their account to be spread too thin across board, thereby limiting the potentials achievable by their trading capital.

  • It leads to crashed accounts

Traders who trade without stop loss hold on to losing trades in the belief that the market will reverse in their favour at some point. For minor trend changes, the trader may come out of the drawdown after a while, but with huge paradigm shifts, it is only a matter of time before the account crashes.

Advantages of Using Stop Loss in Forex Trading

  • It preserves a trader’s capital

This is very important in day trading, where a fundamental release could send price spiralling towards a direction very fast. This way, the trader’s funds are protected, and he will equally be able to enter in the current direction of the market to make back any funds lost.

  • It shows the trader when he is wrong

One of the ways to achieve sustainable trading success is by knowing when you are wrong about a position, and re-entering in the correct direction. If you do not use a stop loss, how will you know when the market has changed permanently?

Disadvantages of Using Stop Loss

  • The obvious disadvantage is stop loss hunting by brokers, but this shouldn’t be a problem if you are using a good broker.
  • Spikes are another disadvantage of using stop loss in trading, as price could temporarily move against you, hitting your stop loss, only to move back in your direction later on.

After looking at these pros and cons, traders can make up their minds regarding what they prefer, but the best traders are those that use stop loss in trading and know the best place to have it on every trade!

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