Loss on forex is a regular business. Traders get used to them over time, but beginners use a stop loss with caution, considering it an enemy and preferring to spend losses.
Money management is one of the cornerstones of Forex trading, and without observing its rules, profitable trading is simply impossible. Whatever your trading strategy, the profit will depend on how you accompany the transaction and limit your risks.
TWO LOSS TACTICS
There are several tens of money management models, but approaches to transaction support can be divided into two large groups:
- loss control tactics;
- outlaw loss tactics.
With the tactics of limiting losses, everything is clear – at the opening of a transaction, a stop-loss order is placed, which closes it with a fixed loss if the price goes in the opposite direction from the predicted one.
Loss settlement is such a risk management method (if one can call it that at all) in which there is no stop loss in an open transaction, or it has a very large size, playing rather a psychological than a practical role.
Typically, this approach is used by novice traders who do not have sufficient practical experience in Forex trading. And with 100% probability, the tactics of residency lead to huge losses, up to the discharge of the deposit.
WHY DO TRADERS NOT SET A STOP LOSS, BUT TRY TO WAIT OUT THE LOSS?
For the most part, the outstripping of losses is a consequence of the psychological state of the trader. For example, having received a deal closed by stop-loss, such a trader does not try to figure out – is it possible that the reason is in the wrong entry point, which entailed the incorrectly set stop loss? He is angry at the market, entering into a confrontation with him – “I’ll take mine anyway.” Naturally, in order not to receive a loss on stop loss, in the next transaction it simply is not set.
It is worth noting that not only beginners but also more experienced traders, in the hope of catching a price reversal, use outstripping losses. Although sitting out is negative in itself, it can be logically explained.
The price of an asset always moves in a range formed by economic and political factors in the countries of which the currency pair consists of currencies. The market is in constant motion. Market participants move the price of an asset within a range, while the price can go up to its borders and fend off them, returning to the starting point. And this process can be repeated many times.
If there is high volatility in the currency pair, then traders do not set a stop loss, counting on a price return due to the cyclical nature of the market.
FOUR OPTIONS FOR OUTSTRIPPING LOSSES
The tactics of sitting out losses are quite diverse. We will consider four options for its use:
1) THE TACTICS OF WAITING FOR LOSSES WITH A LARGE STOP LOSS AND A SMALL PROFIT
Despite the fact that outstripping losses almost always ends sadly, in this form it is very often used in scalping and pipsing.
When opening a position, taking into account the spread, the scalper or piper already receives a minus, and the smallest price noise increases this minus, closing the deal with a small stop loss. Therefore, often scalpers and pipers use an increased stop-loss that exceeds the take profit order size sometimes several times.
The logic here is simple – the probability that the price will go 5 points before take profit is higher than the probability that the price will go 10-15 points before the stop loss.
2) RELOCATION OF LOSSES USING MARTINGALE
When using the Martingale method, the trader does not set a stop loss. If the price goes against the transaction, then at settlement points, transactions are opened in the original direction with an increased lot.
The idea is simple – when the price rolls back, an increased lot of transactions will allow you to close the entire series of transactions even with a small price movement.
Long-term trends or deep non-rollback price movements make their adjustments to the use of this tactic. The trader runs out of funds to open the following Martingale deals since the lot needs to be increased. As a result, protracted trends lead to a very quick drain of the deposit.
3) RELOCATION OF LOSSES DUE TO LOCKING ORDERS
A lot has been said about castles in Forex. There are many opponents and ardent fans of this method. Recall that when setting a castle, a stop-loss order is not placed, but a transaction is opened with the same lot, but in the opposite direction to the original one.
It’s much harder to “clear” the lock than it seems, therefore, the trader often does not fix the loss but tries to find a point for a positive way out of the situation.
As a result, the first profitable castle order is closed with a profit, and the second one hopes that the market will roll back and the loss will decrease.
4) JUST THE LACK OF STOP LOSS
As a rule, this is a sin for many newcomers who simply do not know how to calculate the correct entry point into the market and, accordingly, assess their risks.
Having “missed” the correct point, such a trader, for example, opens a bought deal in an uptrend not in the middle of the trend support line, but in the middle. The stop loss set under the support line is too large, and if you set it below the previous local minimum, it will most likely be affected by the micro correction of the price.
The solution was found – not to put a stop loss at all, but if that, close the deal with your hands.
Naturally, no one closes the loss with his hands, hoping that the price is about to turn around. Having gotten into a protracted price movement, such a trader either merges the deposit, or nevertheless gathers his strength and fixes the loss manually, but its size is already not comparable with that which could have been received at a correctly set stop loss.
IS IT WORTH IT TO STAY OUT LOSSES ON FOREX?
It is unlikely that the Forex currency market can be called a place where you can wait for a loss. The high volatility of currency pairs, together with leverage, can leave only zeros on deposit almost in an instant.
Nevertheless, the tactics of waiting for loss is successfully used in the stock market. For example, to receive dividends on shares, as well as for cut-off, when you just need to wait out the resulting price gap in order to come out with a profit.
Whether to use stop-loss in trading or in some other way to limit your risks is a purely personal matter for each trader. No one forbids you to trade without stop losses, fidgeting on a chair and watching how the negative number in the “Profit” column increases and the balance bar from gray turns red, signaling close Margin Call. But if you came to Forex for money, then staying out of losses is definitely not your tactic.