The eternal question, to use stop loss or not?
Well, it’s not easy to answer on this very delicate question, but… I wrote in my risk page that you should always use a Stop Loss, to prevent you’re capital from huge decline and big loss. Must say that I stand by that oppinion for most of the retail traders. But, what’s the most important in that case is, how to use the same!? I know that, many of you are losing to much with stop losses as well and that you think it’s better not to use it, right!? Well, you are right too. So, how to decide what to do and when you’re wrong?
The most common mistakes by using the Stop Loss in trading
- You have opened a too big position compare to you’re capital! Of course that you’re afraid to make a huge loss and you protect you’re position near to the entry. You’re stop loss is in constant danger to be capted by the market and when it does, you’re angry. Anger forces you to open another position, maybe even a bigger one to return that loss quickly and you lose again. 3-4 losses in a row and you have lost too many of you’re capital, there is no way to recover. Most of you with this ‘type’ of trading also moves a stop loss to the break even (zero) to quickly as well, after wich the market is closing you’re positions for several times in a row, after wich you get angry, despite that you didn’t lose. But, it’s only matter of minute when you will make a mistake and lose too much because you’re nervous. What is the solution? Never ever open positions bigger than you should. If you trade with Stop Loss, on the most currency pairs the same must be away from the entry at least 35-50 pips on intra day trades. That 50 pips must be maximum of 0,4 or 0,5% risk of you’re entire capital. Trust me, you will be calm in the situations like this one, even if you lose, but you’re mistakes will be accetable and you will be able to return the loss when ever you want.
- You have placed you’re Stop Loss to close to the SR levels! Sure that you’re stop loss will be in danger to be caught and closed. This happens because you often rush to get into position and even if you protect you’re position with stop loss, you’re do it in a wrong way. You are wrong because you’re entry is in the middle of the range, in between SR levels and you’re protection or stop loss is reachable all the time, up or down. How to avoid this? It’s simple, don’t rush to get in to a position. Wait for a strong SR levels for entry and then place you’re stop loss bellow or above the position, it will be more secure and you will be more relaxed. Of course, use the proper risk management in this case as well and never risk too much. In the stronger SR levels, higher TF’s like weekly or monthly, you can open a stronger position and on the smaller TF’s like H4 or H1 or lower, open a smaller one!
What are the options to trade without Stop Loss and how to do that?
Yes, there is possibility to trade without Stop Loss and it’s not strange to see someone not to use the same. But, this is also a matter of risk management. Let’s say that you have opened a position in wich you’re risk is 1 or 2% of you’re entire capital, but in a range of 300 pips. Who cares!? You’re position could be a 100 pips in minus, but you can always wait for return and be patient, if there is enough technical levels in you’re favor. In a case like this, I recommend to close the position if and when the same returns on you’re entry level. Why? Well, it’s obvious that you have made a wrong entry, despite this return. If you’re position went only in minus of 30-50 pips, I would try to take at least the same in the opposite direction, in you’re predicted direction from the start. If you’re entry was in great position from the beginning, you can target 80 or 100 pips on intra-day or 300 pips on intra-week, it’s up to you.
I know that this is a most common question in you’re head. Mostly because the market always returns, especialy short term, right!? For how many times you have lost you’re position and an hour latter, the market returns. You think, shit I was right! But you have lost you’re position, mostly because it was too big and you can afford only a small range for floating risk in that moment. If you do it like I have descsribe it above, you can be maybe more profitable then you are in trades with stop losses. But, risk management must be on the highest level in this strategy. Because, the biggest mistake what can be made in this strategy is to open a too big position, made a mistake and wait for return. You can burn you’re account easy in a matter of a day or few hours. Because, the market have no obligation to return on you’re entry level. Always think of that!
There is also a posibility of hedging, but I will write about that some other time.