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Lesson 16: Should we put stop loss trading on Forex?

Published 22.02.2015 at 12.35 PM.

Hello, dear friends. In the comment section, I have recently found the following question: “Should we put stop orders in case of a good deposit? Sooner or later, the market will reverse. We only need to wait to close the position. What do you think about it?”

Taking into account a big variety of ambiguous answers, let’s look at this issue from different points of view. Some people suppose that if a trader has a lot of money, it is not necessary to put stop orders because the price will go back and the deal will be closed either in the break even zone or with profit. However, such an approach can be applied only when trading liquid pairs without leverage. In this case, the profit will be very small. That is why it is better to deposit money in a bank at interest.  

If you use the leverage of 1:4 or bigger and deposit all your money, there is always a possibility that the trading pair will slip by 25% that, in its turn, can lead to Margin Call. For example, let’s look at any pair that contains the Swiss franc. In January, the franc slipped by 25-30% for only one hour. All traders that had short positions on the Swiss franc with the leverage of 1:4 and no stop orders lost their money.

There is another example. One trader organized a webinar, during which the market crash occurred.

The video clearly shows a breakout of a saucer bottom, under which there were a lot of stop orders set by buyers and pending orders set by sellers. The price slumped by 10% failing to meet support of large bids. As a result, traders, who did not set stop orders, suffered significant losses or lost the whole deposit.

When is it possible to trade without stop orders?

You can open deals without stop orders if a part of the money you use for trading comes from your own savings. In this case Margin Call will act as a potential stop loss. However, from the psychological point of view, you should be ready for sporadic losses of deposits. Of course, you have a question: “How to make money if the market reduces the deposit to nothing from time to time?” In fact, it is rather easy. If you trade without stop orders, you should regularly withdraw profit. For example, if you increase the deposit by 100%, it is time to withdraw money.

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