How Viable is Forex Trading Without Stop-Loss Strategy?

20 August 2020

Stop Loss order is an order type that is placed after market or limit order, after a trader buys or sells an asset and it limits potential for losing. When price moves against the prediction, Stop Loss automatically gets triggered and saves trader from further losses

Despite all of its uses, there are still some successful professional Forex traders who do not use stop-loss orders. How is this possible?

There are several ways to make no stop-loss Forex strategy viable. However, it's worth mentioning that trading without stop loss is highly dangerous, and it is not recommended for traders.

As for the exact methods, one approach would be to use hedging strategies. For example, traders can choose currency pairs that have a high correlation and open an equal amount of positions on opposite sides of the trade. However, hedging is a complex strategy and might not be for everyone.

Furthermore, no stop loss strategies can be used by some scalpers that execute trades in minutes and actively monitor their trades.

Finally, if traders have enough capital at their disposal, they could limit the downside by using only 1:1 or 2:1 leverage. This can give them the ability to absorb their losses without risking their entire trading account balance. For example, a 2% loss may wipe out an entire position if a trader is using 1:50 leverage, but if he or she uses no leverage, then this might be a very small loss.

Forex No Stop-Loss Strategy

There can be several benefits to using Stop-loss orders:

Traders are using stop-loss strategies for Forex to limit their losses and consequently protect their trading account, in case the market moves against their positions.
Such a method is also helpful in the sense that it takes the emotions of an individual out of equations.
Stop loss orders can protect traders from potential losses if they can not access their trading accounts due to losing connection to the internet, personal problems, or for any other reason.

It's not recommended to trade without stop loss as it's highly dangerous and can result in blown up accounts. Losing traders let their losing run and cut their profits short. As a trader, to make profits, you need to reverse that and make more money when you are correct to cover the losing trades and increase your trading balance.

Therefore, stop losses can play an important role in your trading strategy.
On the other hand, a trader might have several reasons for not using Stop-Loss orders. Firstly, when it comes to traditionally more volatile pairs, fluctuations can trigger the stop-loss order prematurely, inflicting some losses on the trader’s account, only to reverse to its initial level. So essentially, the stop-loss order kicks in and closes the trade before it has a chance to become profitable and let traders earn their payout.

To illustrate an example of such a scenario, let us take a look at this hourly USD/JPY chart:
Trading Forex without stop-loss strategy

Let us suppose that an individual has gone through some technical and fundamental analysis and decided to open a long USD/JPY position at 107.50 level, on April 2nd, 2020, where our chart begins. As we can see, after some hours, the pair fell to 107.20. So if a trader placed a stop-loss order for example at 107.20 or higher level, then it would have triggered, positions would be closed.

The exact amount of losses would depend on the level of leverage an individual was using. For example, with 1:50 leverage, it would amount to 15% of the sum invested in this particular trade. On the other hand, if a trader used no leverage, the losses would be the equivalent of 0.3% of invested funds.

In any case, what followed was surely disappointing to those traders whose long USD/JPY positions have been closed. After going through a short live bottom, the pair appreciated steadily and in 4 days have reached 109.20 mark. So in such a short space of time, the US dollar has risen by 1.6% against the Japanese Yen. Consequently, those traders who opened a long position 4 days before and patiently waited for USD appreciation, could have earned some nice payouts.

As we can see from the chart above, traders have faced such scenarios several times. Even after reversal and USD/JPY downtrend began, there were at least 6 false bounces, before the pair settled for 107 to 108 range.

Besides those potential problems mentioned above, there are various other reasons why traders might prefer trading Forex without a stop-loss strategy.

For example, there are various market participants who are using hedging strategies and therefore see no need to use stop-loss orders. Alternatively, some traders use no or very small leverage, therefore, using stop-loss orders might not make much sense to them.

Finally, placing a stop-loss order does not always guarantee that the trade will be close to that specified price. If there is a high volatility in the market, or liquidity has dried up, the trade will be executed at the next best price to the stop loss order. Such an event is caused by slippage.

Forex No Stop-Loss Guides and Strategies

After discussing the possible arguments about whether to use a stop-loss strategy, the next obvious question is how is it possible to trade Forex without using those types of orders?

Before moving on to specific methods, there are two important essential components of any viable no stop-loss strategy for Forex. Firstly, a trader must regularly monitor the latest developments on the Foreign Exchange market, otherwise, he or she might miss some critical price movements, which can easily lead to severe losses and ignored opportunities.

One popular method to limit the potential downside without using a stop-loss order is utilizing hedging strategies. As it is well known, some currency pairs are highly correlated with each other, meaning that they mostly move in the same direction.

In order to illustrate this phenomenon, let us take a look at those two images below. The first one is a daily EUR/USD chart:
Forex no stop-loss strategy

We have also the daily EUR/JPY chart:
Forex no stop-loss strategies

As we can see from the above, EUR/USD and USD/JPY can be quite closely correlated. Obviously here we are not dealing with a perfect 100% correlation, however, they are mostly moving in the same directions.
During November and early December 2019, both of those pairs were consolidating. Then we can see that from the new year days until late September, EUR/USD and EUR/JPY were engaged in a downtrend.

In the third stage, both of those currency pairs recovered and rallied from the middle of Autumn 2019 until the end of that year.

Finally, from January until the present day, EUR/USD and EUR/JPY are once more taking part in the downward trend. The Euro fell against the Dollar from the January high of 1.12 to 1.08 by the end of April. The exchange rate of the single currency also declined in relation to the Japanese Yen, from 122 level to near 116 mark during the same period.

As we can see from this example, although the exact scale of variation of those two pairs might be slightly different, they are still engaged in similar trends and can be considered as highly correlated with each other.

Essentially, a trader can open a long EUR/USD and short EUR/JPY position at the same time. After observing the market movements for some time, an individual can close losing trades and earn a higher return from the winning trade in order to offset losses and earn some payouts on top of that.

Some traders might prefer using options. They do have to pay a premium fee for this kind of insurance, however, for some people, this brings peace of mind, and therefore for them, it’s worthwhile.

How does this work? Well, basically a currency option represents a contract, which gives its buyer a right to buy or sell a specific currency at the predetermined exchange rate. The data or duration at which the option can be exercised is also written in the agreement. It might be also useful to mention here, that the buyer is not obligated to use the right which was given to him or her by this option, however, he or she must pay a premium to the seller.

Therefore, after opening a position, a trader can also purchase an option for that specific currency pair as an insurance policy against potential losses.

Finally, there are some market participants who prefer trading without any leverage. For them, the market volatility may not present such risks as those with higher leverage levels. Consequently, they can afford to be more patient with the market, and if they deem it worthwhile, to wait for reversals as well.

Scalping without stop loss

Some scalpers are using no stop loss strategy. A scalp trade usually lasts a couple of minutes, and scalpers are actively involved in trading. They close trades manually if the trade goes against their predictions. However, it's important to note that closing orders at the right time without hesitation requires experience and a high level of emotional intelligence. Trading without a stop loss is incredibly challenging and can only be done under specific market conditions. If currency movements are too volatile, trading without a stop loss can result in huge losses.

Scalpers have a very small timeframe to conclude their trades. Which might explain why some of them do not use stop loss orders and close trades manually. They save precious time.

Forex No Stop-Loss Strategies – Key Takeaways

Traders are using the Forex stop loss strategy to cut their potential losses in case the market turns against them. SL orders protect deposits and eliminate the emotional factors from the decision-making process.

Trading without stop loss can be done, however, it requires a skilled and experienced trader. Traders still need to put some methods in place to guard against large potential losses. This can include employing hedging strategies, options, or using very low or no leverage.
It might be helpful to keep in mind that placing a stop-loss order does not guarantee that the position will be closed at exactly that price, which is mentioned in the order. In case of high volatility or low liquidity, the actual price might be several pips away from the intended target and consequently, a trader might face higher losses than originally anticipated. There are instances when trades are not executed at intended price due to slippage.

Why trading without Stop Loss is a bad idea

Trading without a Stop Loss (SL) is like sailing rough seas without a life jacket - it might seem fine for a while, but the risks always outweigh any potential gains. A Stop Loss is a crucial safety measure in trading, acting as a safety net to protect investors from huge losses. Opting to trade without this protection exposes traders to various dangers that can swiftly eat into their money and threaten their financial stability.

One main reason why trading without an SL order is risky is the unpredictable nature of financial markets. Prices can change rapidly due to economic factors such as: economic news, global events, and market sentiment. Without a stop loss, traders open themselves up to sudden and unexpected market shifts that can lead to serious losses. Even seasoned traders cannot accurately predict every market change, making stop losses essential to minimize potential harm. In fact, many profitable traders are correct only 50% of the time. The trick is that they make more when they are correct and cover for the losses.

Furthermore, emotions play a huge role in financial trading, and without a set exit plan such as stop loss, emotions can take control. Fear and greed can cloud judgment, causing traders to cling to losing positions in the hope that the market will turn in their favor. This reluctance to cut losses can lead to a downward spiral as losses accumulate, and traders become emotionally attached to failing trades. Losing traders often think that they’ll manually get out of active position once the price reaches a certain point, and when the price does reach that point, traders think, I’ll wait for the price reversal and get out at breakeven. Often this kind of thinking is the main reason why traders blow up their accounts.

Successful trading is based on effective risk management, and stop loss order is a key part of any solid risk management plan. By setting a specific level at which a position will be automatically terminated, traders make sure they only risk a set amount of their capital on each trade. Without a stop loss, the potential for large, uncontrolled losses goes up significantly, putting a trader’s entire capital at risk in a single unfavorable trade.

In addition, not having stop loss orders in place can lead to stress and anxiety for traders. Constantly watching the market without a safety net can be mentally exhausting, adding to the psychological toll of trading. The fear of a big loss can hinder decision-making and lead traders to stray from their strategies, resulting in more losses.

It’s important to have some kind of safety mechanism in place when trading. Trading without stop loss is like driving without a seat belt. It might not feel like a big deal until you find yourself in a car accident. Traders that do not use any risk type of stop loss or hedging strategy are putting their entire account at risk with each trade.

It should be mentioned that there are some professional traders that trade using swing trading strategies and do not use SL orders. Instead, before and during risky events they hedge their positions. However, implementing hedging strategies properly is super difficult.

FAQ: Trade Forex Without Stop-Loss Strategy

Is take profit orders as popular among traders as stop-loss orders?

A profit order specifies the price at which the trade will be automatically closed for a profit. There are many professional full-time traders who place both stop-loss and take profit orders when they open their positions.

However, it's worth mentioning that not all market participants are accustomed to using both of those orders simultaneously. Many traders might prefer to only limit their downside with stop-loss order and close winning trades manually. The reasoning behind this is that in trending markets, cutting profits too early will damage profits. Traders need to ride the wave and get the maximum profits that the market gives them. Often, profit targets depend on how a given trade develops.

Take profit orders are still common in the marketplace, but because of the reasons mentioned above, they might not be as popular as stop-loss orders. Placing stop loss orders is an absolute must in most cases.

Why do many traders using scalping strategies avoid using stop-loss orders?

The scalping strategy usually involves very short term trades, typically with 1 to 15-minute timeframes. During all this time a trader is in front of the trading platform, always in control of the situation, therefore there is no need to insure against potential losses during his or her absence.

Another reason for this is time management considerations. Preparing a stop-loss order might make very little difference for swing or long term traders, however, for scalpers, this is an important time frame, they do not want to lose on filling out orders.

How useful is trading without a stop-loss strategy for the long term traders?

Trading without a stop loss is very dangerous for traders, especially for long term traders. Losing traders cut their profits short and run their losses. Traders that refuse to take the loss, end up losing an entire account. Stop loss is essential for consistency and profitability.

Traders should always know their risk levels. Profit targets might not always be clear, but risks should always be known prior to opening a trading position. If opening a trade is too risky, the trade is not worth executing.

What are some of the most common mistakes people make, who trade Forex without stop-losses?

One of the traders in this situation is to trade on emotions, not closing trades even after it becomes obvious that it is a losing position and the market is not changing its direction.

Another common error some traders make is to trade with high leverage without a stop-loss order in place. In fact, theoretically speaking, market participants can succeed in trading if they use one of those things in isolation, but doing those two things together is a very dangerous combination and potentially can lead to massive losses. With such blunders, traders can easily lose their entire deposit in a matter of hours.

Can trading forex without stop-loss strategy be justified during the major announcements?

There are several professional traders who do not advise us to trade major economic announcements without having a stop-loss order in place. However, this view is not universal to the entire community. Perhaps, traders with low or no leverage might be more justified in taking that risk.

The major economic releases are usually accompanied by very high volatility. As mentioned before, in this type of environment it is not guaranteed that a broker will be able to close the position on the price specified in the stop-loss order, so as a result traders might face higher losses.

Because of those reasons, some experienced professionals do not keep trades open during the major announcements. They prefer to observe the market reaction for some time, before deciding to open new positions.

How to trade without stop loss?

Trading without stop loss is not recommended. However, if you are still going to trade without SL, it's best to avoid economic announcements as they can result in sharp price moves and bring you high losses. In addition, it's best to trade in a calm trading environment and low volatility pairs. When trading without a stop loss, it's critical to stay close to your trade to be able to close the order manually if something radical happens.

Is stop loss necessary?

Stop Loss placement is an absolute must in most cases. Traders need to know their risk levels. What's more, once the SL orders are placed, it's recommended not to move them. It's important to keep in mind that the power of being in an active position can influence the decision-making process. Stop Loss orders protect the trading account from blowing up. They limit losses and help traders avoid emotional trading.