Forex No Stop-Loss Strategy
There can be several benefits to using
Stop-loss orders:
- Traders are using stop-loss strategies for Forex to limit their losses and consequently protect their trading account, in case the market moves against their positions.
- Such a method is also helpful in the sense that it takes the emotions of an individual out of equations.
- Stop loss orders can protect traders from potential losses if they can not access their trading accounts due to losing connection to the internet, personal problems, or for any other reason.
It's not recommended to trade without stop loss as it's highly dangerous and can result in blown up account. Losing traders let their losing run and cut their profits short. As a trader, to make profits, you need to reverse that and make more money when you are correct to cover the losing trades and increase your trading balance.
Therefore, stop losses can play an important role in your trading strategy.
On the other hand, a trader might have several reasons for not using Stop-Loss orders. Firstly, when it comes to traditionally more volatile pairs, fluctuations can trigger the stop-loss order prematurely, inflicting some losses on the trader’s account, only to reverse to its initial level. So essentially, the stop-loss order kicks in and closes the trade before it has a chance to become profitable and let traders earn their payout.
To illustrate an example of such a scenario, let us take a look at this hourly USD/JPY chart:
Let us suppose that an individual has gone through some technical and fundamental analysis and decided to open a long USD/JPY position at 107.50 level, on April 2nd, 2020, where our chart begins. As we can see, after some hours, the pair fell to 107.20. So if a trader placed a stop-loss order for example at 107.20 or higher level, then it would have triggered, positions would be closed.
The exact amount of losses would depend on the level of leverage an individual was using. For example, with 1:50 leverage, it would amount to 15% of the sum invested in this particular trade. On the other hand, if a trader used no leverage, the losses would be the equivalent of 0.3% of invested funds.
In any case, what followed was surely disappointing to those traders whose long USD/JPY positions have been closed. After going through a short live bottom, the pair appreciated steadily and in 4 days have reached 109.20 mark. So in such a short space of time, the US dollar has risen by 1.6% against the Japanese Yen. Consequently, those traders who opened a long position 4 days before and patiently waited for USD appreciation, could have earned some nice payouts.
As we can see from the chart above, traders have faced such scenarios several times. Even after reversal and USD/JPY downtrend began, there were at least 6 false bounces, before the pair settled for 107 to 108 range.
Besides those potential problems mentioned above, there are various other reasons why traders might prefer trading Forex without a stop-loss strategy.
For example, there are various market participants who are using hedging strategies and therefore see no need to use stop-loss orders. Alternatively, some traders use no or very small leverage, therefore, using stop-loss orders might not make much sense to them.
Finally, placing a stop-loss order does not always guarantee that the trade will be close to that specified price. If there is a high volatility in the market, or liquidity has dried up, the trade will be executed at the next best price to the stop loss order. Such event is caused by slippage.
Forex No Stop-Loss Guides and Strategies
After discussing the possible arguments about whether to use a stop-loss strategy, the next obvious question is how is it possible to trade Forex without using those types of orders?
Before moving on to specific methods, there are two important essential components of any viable no stop-loss strategy for Forex. Firstly, a trader must regularly monitor the latest developments on the Foreign Exchange market, otherwise, he or she might miss some critical price movements, which can easily lead to severe losses and ignored opportunities.
One popular method to limit the potential downside without using a stop-loss order is utilizing hedging strategies. As it is well known, some currency pairs are highly correlated with each other, meaning that they mostly move in the same direction.
In order to illustrate this phenomenon, let us take a look at those two images below. The first one is a daily EUR/USD chart:
We have also the daily EUR/JPY chart:
As we can see from the above, EUR/USD and USD/JPY can be quite closely correlated. Obviously here we are not dealing with a perfect 100% correlation, however, they are mostly moving in the same directions.
During November and early December 2019, both of those pairs were consolidating. Then we can see that from the new year days until the late September, EUR/USD and EUR/JPY were engaged in a downtrend.
In the third stage, both of those currency pairs recovered and rallied from the middle of Autumn 2019 until the end of that year.
Finally, from January until the present day, EUR/USD and EUR/JPY are once more taking part in the downward trend. The Euro fell against the Dollar from the January high of 1.12 to 1.08 by the end of April. The exchange rate of the single currency also declined in relation to the Japanese Yen, from 122 level to near 116 mark during the same period.
As we can see from this example, although the exact scale of variation of those two pairs might be slightly different, they are still engaged in similar trends and can be considered as highly correlated with each other.
Essentially, a trader can open a long EUR/USD and short EUR/JPY position at the same time. After observing the market movements for some time, an individual can close losing trades and earn a higher return from the winning trade in order to offset losses and earn some payouts on top of that.
Some traders might prefer using options. They do have to pay a premium fee for this kind of insurance, however, for some people, this brings peace of mind, and therefore for them, it’s worthwhile.
How does this work? Well, basically a currency option represents a contract, which gives its buyer a right to buy or sell a specific currency at the predetermined exchange rate. The data or duration at which the option can be exercised is also written in the agreement. It might be also useful to mention here, that the buyer is not obligated to use the right which was given to him or her by this option, however, he or she must pay a premium to the seller.
Therefore, after opening a position, a trader can also purchase an option for that specific currency pair as an insurance policy against potential losses.
Finally, there are some market participants who prefer trading without any leverage. For them, the market volatility may not present such risks as those with higher leverage levels. Consequently, they can afford to be more patient with the market, and if they deem it worthwhile, to wait for reversals as well.
Scalping without stop loss
Some scalpers are using no stop loss strategy. A scalp trade usually lasts a couple of minutes, and scalpers are actively involved in trading. They close trades manually if the trade goes against their predictions. However, it's important to note that closing orders at the right time without hesitation requires experience and a high level of emotional intelligence. Trading without a stop loss is incredibly challenging and can only be done under specific market conditions. If currency movements are too volatile, trading without a stop loss can result in huge losses.
Scalpers have very small timeframe to conclude their trades. Which might explain why some of them do not use stop loss orders and close trades manually. They save precious time.