Trading Without a Stop Loss: Five Appropriate Situations

Sunday, 9 December 2012
Generally speaking, trading without a stop loss in Forex is a really bad idea.  There are a lot of inappropriate reasons for doing so, which you should never consider.  Don’t decide to not set a stop loss simply because you’re lazy or because you “know the trade will win,” or because you’re so terrified of getting stopped out before you go on to profit that you think it’s okay to have a bottomless pit for your existing profits to fall into.  There are a few situations however where trading without a stop loss could make sense.  Here are five of them:

  1. You’re hiding your stop loss from your broker.  On occasion you may suspect your broker is dishonest and cheating you by deliberately stopping you out of trades which you would otherwise have won.  Note that if you’re trading with a reputable broker, this is a rarity, and in all likelihood, your losses are your fault.  It’s not outside the realm of possibility, however, so you could try trading without a stop loss to see whether your fortunes improve.  If they do, it’s probably time to search for a new broker!  In this situation, however, do not trade without a mental stop loss.  If your mental stop loss is hit, exit your trade immediately as you would if you had a real stop loss in place.

  1. The stop loss is too low to be set.  This could be the case if for example you’re placing trades on a very small time frame and you’re trying to make money on only a few pips (scalping).  In this case, the platform may tell you the stop loss you wish to set is too close to your entry level.  In this case, once again, you’ll be fine trading without a stop loss, but only if you again have a mental stop loss and exit immediately when it’s hit.  This is quite risky however since your trades will be moving very fast.  Your reflexes will become a risk factor in your fortunes.

  1. You’re doing a very long-term trade using a buy and hold strategy.  You expect huge price swings over the months or years you’ll be holding your position (perhaps it’s a carry trade, and you’re profiting off of the interest rate as well as the movement of the currency).  Note that you don’t have to forego a stop loss to do long-term trading.

  1. Your exit strategy involves changing factors and you can’t continuously update your stop loss.  Some systems involve waiting for certain indicators to give a signal before a trader exits from a trade.  In these situations it may not make sense to have a stop loss set, because that would be inconsistent with the trading method.  If you trade this way, however, you need to make sure that you’re available to exit your trade manually, which means you need to set up alerts to let you know if your exit criteria have been met.  You’ll also need criteria for exiting at a win as well as a loss.

  1. You expect price to spike meaninglessly before resuming its original movement.  Perhaps for example you’re in a trade over the weekend, and you expect the usual volatility and unpredictability when the market opens.  You take away your stop loss (or move it) until the volatility passes.  This keeps you from getting stopped out of your trade for no reason.  Or maybe you know that a news report is coming out, but you don’t have any reason to expect it to do more than cause a price spike.  You can remove your stop until the chaos abates and then put it back.  You need to make sure you test any strategy like this thoroughly so that you can learn to distinguish times when the market is likely to correct again from times when the jump in price will have a lasting effect which could cause you to lose money.

Any time you’re going to place a trade without stop loss, it needs to be done for a good reason such as one of the reasons above.  And when you can avoid it, you should.  A stop loss not only helps you save money, but in many situations it helps keep you honest.  If you don’t have a good rationale for it, you shouldn’t do it.  And when you do have a strategic reason for your decision, it should be one that you’ve tested thoroughly on historical and real-time data.  In most cases, you should still have some kind of mental stop loss—because there has to be a point where you cut your losses according to some objective criteria.  If there isn’t, your trades will be driven by emotion and you’ll lose money. 

If the stop loss issue involves your broker (and you confirm this by trading without a stop loss and find that you’re clearly more profitable), you probably should find a broker who is trustworthy so that you can get on with your trading career and get back to using a stop loss.  A broker who cheats you out of your profits by stopping you out early is going to cause you many other problems over time.  You have a right to expect good, transparent service from your broker.

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