Reasons why some traders do not use Stop-Loss:

  • I have mental Stop-Loss; I will exit my trades manually when it turns against me at certain pips.
  • Price will come back, it happens in the past, and it certainly will happen again.
  • I cannot let my broker see my stops, they would hunt it down.

 

Why mental Stop-Loss Fails

Ok, let we look at some statistics first. Below is a table displaying the maximum pips range of four forex major pairs from the last 2,000 bars for 1 minute, 10 minutes, one hour, and 1-day time interval/period.

 

As you can see from the table above, price could move very far within very short period. Take EURUSD for example, could you react fast enough to exit manually when price move 59 pips in the wrong direction in just 1 minute?

Remember when The Swiss National Bank decides to set a floor price of 1.20 Swiss francs to the euro to halt the continuing rise of its currency? How could you manually-exit your trade when price instantly jump after the announcement and end up 445 pips in just 10 minutes?

Power failures, lost of internet connections, computer crashes are other reasons not to use mental Stop-Loss.

   

Waiting Price to Come Back

Market moves in cycles, prices moves up and will come down and vice versa. That statement is the reasoning for traders who let bad trade runs hoping that someday it will turns into profitable one.

The chart below is an example of how it looks like:

On October 3 2008, we open Long position expecting market to turn direction. Instead, price gapped down but we do not exit the position because we believe that price will soon go up to close the gap. Price continues to drop by 1,438 pips before turn back up (our equity is strong enough to hold this massive draw down). On December 16 2008, market finally reach our opening price and continues to move up.

It is true that the trade turns out profitable, but we must wait for more than two months before it happen and 1,438 pips floating loss that dangerously threaten our account.

The “wait till come back” style of trading is very unproductive and inefficient use of equity. If we just cut our loss small and look for other good trading setups, we could make many trades during this two months period with many profit potentials.

Traders who let bad trades run usually could not accept that taking losses are common reality in trading. Human naturally do not like losses because it hurt. However, when it comes to trading, we should be able to overcome this psychological barrier if we want to succeed.

 

My Broker Hunt My Stop-Loss

If you really think that your broker constantly hunting your Stop-Loss, there is only one solution: MOVE OUT! Withdraw all your money and close your account, then move to another better broker that will not hunt your stops.

 

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In conclusion, every trade should have Stop-Loss order placed. It is very important:

  • As the ultimate account protector
  • It enables us to analyze our trades. If a trade stopped-out, we could step back from the market and reconsider the situation. Did we make mistake in reading market direction? Should we enter earlier, or later? Should we change our sentiment from bullish to bearish? And so on.
  • Open opportunities for other good trades instead of stuck with the bad one for a long time.

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Trade safely and profitably. Good luck for you all!

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