Let's recap what stop-loss means. A stop-loss is an order that a Forex trader places on an instrument, which remains until that instrument reaches a specific price, then automatically executes sell or buy depending on the nature of the initial order (buy if it was a short order, sell if it was a buy order).
Setting a stop-loss is particularly useful for removing emotions from your trading decisions and keeping a constant watch on your positions, so you don't have to.
However, you may sometimes hear about traders who trade Forex profitably without stop-loss. In fact, some traders oppose using stop-losses at all. These traders rely on Forex no stop-loss strategy to bring them profit.
Some of them do succeed, but the majority don't.
Before you decide on whether or not to use a stop-loss strategy, you should consider the advantages and disadvantages of placing stops. Even then, it would be wise to try out your no stop-loss strategy on a demo account first.
First off, setting a stop-loss doesn't cost you anything. You will only bear costs when you reach the stop-loss price and sell or buy.
Why is this important?
Well, there are always FX traders who don't want to close a losing trade because they think the market will move in their favour. But the problem is, the markets are not generally known for moving in favour of individual traders, so trading Forex with no stop-loss is literally putting emotions over logic.
But keep in mind that stop-loss orders do not guarantee you profit – nor will they make up for a lack of trading discipline. You need to be confident in your trading strategy and stick to your action plan.
Why do some traders disagree with using stop-losses? Before we look at a no stop-loss Forex strategy, let's consider a few things. In a normal FX market, a stop-loss acts as intended.
For example, if you buy at $50 and set a stop-loss order to $47.50, then it restricts your loss to 5%. However, in a fast-moving market where prices change rapidly – the price at which you sell can differ from your stop price.
Moreover, a short-term fluctuation may trigger your stop price prematurely. In this case, pick a stop-loss percentage that allows the price to fluctuate. Be aware that you shouldn't set a 5% stop-loss, on an instrument that fluctuates 10% or more in a week because you will most likely end up losing money on the commissions from your stop-loss.
Another common problem is the transparency of stop-loss. There is a game that some market makers play, whereby they run the stops when the price is low enough, then trigger a mass of stop-loss orders. After an instrument is sold at a popular stop-loss price, it reverses direction and rallies.
Another disadvantage is that you are giving control of your sell order to the the system. In volatile markets, this can cost you money. This is one of the reasons why some traders think trading without stop-loss is better.
But novice traders should not take this advice right away. Instead, first try to understand what a stop-loss is - educate yourself on its basics and strategies.
If you want to trade Forex successfully, you must follow an effective money management strategy. The majority of traders choose to use stop-losses. Yet stop-losses are not always effective and can often lead to failure for day traders.
If you are willing to try trading without a stop-loss, there is a specific no stop-loss Forex strategy. But please note that despite similarities between Forex and the stock market – Forex traders rarely use the same strategies as equity traders.
To potentially make a return on your investment in the stock market, you buy shares and hold them until the fundamentals change. However, good Forex traders do not simply enter trades based on the results of technical analysis. They also have to consider the underlying economic, financial and fiscal factors.
A rule of thumb for trading without stop-loss is to follow trends.
There are two major aspects to the long-term direction of a currency pair – the economic fundamentals, and the country's geopolitical conditions. The fundamentals may include the central bank's interest rate policy, the balance of payments numbers and the government's political stance.
The standard principle is that if a country's economy is stable, its currency should appreciate against currencies with weaker economies. Fundamental analysis provides a long-term outlook on a currency. The trader simply has to wait for pullbacks to go long on a specific currency.
If a trade goes negative, it can go to a greater degree than when high leveraging is in play.
However, there are some exceptions to this rule. If a correction is coming, take a small loss by exiting previously negative trades, and reverse positions to take advantage of the changing trend.
If you decide on trading Forex without stop-loss, it is important to use profit-protection strategies.
Stops don't just help to prevent losses, they can also protect profits.
For example, take a trailing stop-loss. Trailing stop-loss protects profits that are already on the table. When the trade made significant gains, put a trailing stop between the entry point and the current price action.
This allows the current price to continue, in case the market offers more profit. At the same time, it helps ensure the trade will not lose money.
Next up is the limit order. A limit order exits parts of a trade when the market expects a certain pullback but does not hit the profit targets.
To avoid large losses, many Forex traders use tight stop-losses. However, this frequently ends in multiple small losses that can quickly accumulate.
So, is it actually possible to trade Forex profitably without stop-losses?
Yes. But for such a strategy to work, you need to keep several things in mind, including trading in the direction of the trend, while avoiding exploiting margin/leveraging facilities. Also, only being bullish on currencies that are fundamentally strong.
If you want to try a no stop-loss strategy, you have to understand how stop-losses work.
Stop-loss is a popular tool in the Forex trading community and you can possibly trade profitably without it. But while the decision is entirely up to you, we don't recommend Forex trading without stop-loss.
Check out additional trading options with feature-rich MT4 Supreme Edition trading platform: