Do I need a stop loss on forex?
Reasons not to set a stop-loss
As we know, Forex traders can be conventionally divided into two groups: those who set stop-losses and those who do without protective orders, explaining their reluctance by the following reasons:
1. The price is bound to catch a stop and then it will follow my trading strategy; 2. I remember about levels and I can close manually at any moment; 3. The lot is small, so I am able to withstand drawdowns easily; 4) I start to get lucky.
What is a stop loss and what is it used for?
- Stop-loss is a protective order, which forcibly closes trader's position if market goes in opposite direction from the scenario, thereby limiting losses by a specified number of points.
That is, in terms of functionality - stop-loss is a trader's assistant and protector of his deposit from unexpected losses.
The currency market is rather dynamic and very often beginner (and not only) trader can lose his deposit in one single deal, especially if a leverage provided by broker is ridiculously large.
Many traders, working in short-term mode or using scalping strategies, think they are ready to stop the losses themselves at any moment, manually closing the position. The practice shows the opposite. Rarely will a trader hit the stop button on time. Usually in this psychological argument "to close or not to close" greed and hope that the market will "change its mind" and go in the right direction wins.
But there is no trading discipline, there is no profit. It is known that one of the most important criteria for determining the volume of the trading lot is the distance to the protective order. The further the stop loss is set, the less money should be used to enter the trade. Therefore each trading strategy should have a clear set of rules for setting a proper stop.
A far off order, if not calculated correctly, will not prevent a position from losing, but the loss will already be quite noticeable (which is why it is recommended to reduce the volume of the trade), a close stop will surely be taken away, which will also cause a minimal loss, albeit minimal.
Professional traders know how to set a stop-loss so that it, on the one hand, will protect the deposit in case of an incorrectly opened trade, on the other hand, will not work against elementary market noise.
It is noteworthy that the common way of setting protection above/below the nearest maximum or minimum mark, as well as near support or resistance levels is not entirely correct due to frequent false price breakdowns in one direction or another.
The algorithm of preliminary calculations of the deal should be considered in the following sequence:
1. Determining the direction of the current trend;
2. When trading using volumes, in addition to this, the volume needed for entry is determined;
3. Marking the level for setting protective orders;
4. Calculating the lot size based on the percentage of deposit funds involved and the distance to the level of protection;
5. Entering the market according to the trading system signals.
Have a profitable and successful trading!