Forex Trading Without Stop-Loss – a Ticking Time Bomb

Hello, dear readers! In this overview, we are going to talk about the why not all traders like stops (Stop-loss); why this kind of trading is evolving, and we will look at some examples of why trading is ending without stops.

In the article, Money Management, we learned how important it is to follow capital management principles, and that it is not worth risking more than 1-3 % of a deposit in one transaction. We also saw from the article what would happen if we did not follow those principles.

Usually, when a stop is triggered, and a price is moving as forecast by the trader, he or she begins to not like stops. They think that “if a price is coming back earlier or later what is the purpose of those stops?” It is possible to wait for the temporary loss. In this way, one comes to the conclusion that a trader begins trading without any stops at all, that traders are buying against a trend, or that they open controversial positions and are sitting in “minus” positions for many months. True, it can provide a good profit for some time, as well as a nice trade history (because there are no losses), but it is an invisible minefield. It is an invisible minefield in which even I have traded and, as a result, lost my first deposit. Lesson learned!

There are lots of strategies, including some of those that are on sale, which work without stops. There are also profitable strategies without stops that give good results, even for several years, which can be created very quickly., It is much more difficult to create a profitable strategy with stops. However, a strategy without stops is a ticking time bomb. If you intend working seriously in Forex for a long time, do not waste your time trading without stops.

Let’s investigate a daily GBP/USD chart taken from the period from the end of 2007 until the end of 2008. This was the time of the 2008 mortgage crisis, in which thousands of traders burned their deposits, and huge sums of money were lost. It was those traders working without stops that were the biggest losers. Why did that happen?

Let’s see, for the two year between 2005 and 2006, the GBP was very stable. A lot of people created their strategies based on that trend continuing. If a trader bought GBP during that time and did not use a stop-loss, nothing very scary happened. There were just the normal small variations.. The trader could be forgiven for thinking “If I worked with stops, I would already have made a lot of losses!” For two consecutive years, he or she made a good profit.

However, the situation changed dramatically. Rates dropped suddenly over a two-month period and all money earned in the previous two years was lost. Where is the evidence of the bomb here? It is here: Imagine that you started trading in 2005. You began with small sums, then made bigger trades, transactions were increasing, and your profits were also increasing. In 2007, your orders were bigger than 2 years before. Then came the drop and your losses outweighed the previous gains.

How is a trader thinking in such a situation? He or she is thinking this way: “Well, something is wrong, but this correction must end soon and the trend is going to go back up again.” Unfortunately for the trader, he or she often makes the situation worse for themselves. They start making more trades, but the price continues to drop and losses continue to mount. In an attempt to buy them self out of trouble, the trader buys more and more, but the prices are still falling and the losses continue to mount. What should be done? From the above chart, it is possible to see the point at which a lot of people started to panic. A huge psychological tension appeared when it was seen that more money has been lost than you have earned in the two previous profitable years, and that there is no other way back. what should be done further? The second column shows that a lot of people, who lost everything, move out of Forex trading. They had made a profit in the previous two years, but in 2008 they lost their deposits, which in many cases was money they had borrowed. Unfortunately, many traders even lost their lives. All this was because they traded without a stop.

Crises will happen again. Therefore, to ensure that you survive, your strategy must include stops. This kind of strategy will bring you profit for the long-term.

Never improve your strategy by refusing stop-loss. If you think that a stop-loss is disturbing you, or that you cannot earn stable profit because of it, it is not the stop to blame, it is your strategy that is faulty.

Well, and to end on, if you still think that stop-losses are for the faint-hearted, please watch this video 🙂