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Forex top tips – never trade without a stop loss!

As a full time forex trader, and one who teaches and mentors students around the world, I am constantly surprised and amazed at the number of forex traders, ( and indeed many others) who trade without a stop loss, exposing themselves to unlimited losses and a a quick exit from the market as a result. There are many excuses that I hear from traders, and the most common is that if I place a trade without a stop loss, then at least I am immune from the stop hunting which goes on each and every day in the forex markets, both from the interbank market makers and also from your own broker. Whilst this is undoubtedly true, this is no excuse, and is just a fact of life that we have to accept as traders, and in order to make consistent profits, then we have to accept small losses, and the key here is small. If you trade without a stop loss, then your losses will be large and unlimited, as you will then be trading on emotion, as you hope that the market will turn, and your positions recover. This rarely happens, and generally the losses simply grow larger, until you reach a position where your broker issues a margin call, or closes your positions for you, to avoid further losses.

The reason many traders refuse to use a stop loss, is simply that as humans we are naturally optimistic, and are programmed to have a positive outlook on whatever we do, and this is the same in trading, which is why accepting that our analysis of the market was wrong, and allowing the market to take us out of a position is so hard. However, to become a successful trader, this is a mental barrier that you must overcome if you are to succeed. The reason is simple. A stop loss, whether a manual one or a trailing, will keep your losses small, and provided you are also able to allow your profits to run, then ultimately you will be successful as a trader. Trading is about mental strength and this is one of the key skills you have to learn, which is to master your own emotions. If you cannot accept a loss, then trading is not for you, but if you can, and see this as a step closer to a winning trade, then you have made the mental step change that will ultimately help you succeed in the toughest of all markets. So for today, my forex top tip is never trade without a stop loss – short and simple – unless you are hedging in another pair or market, but that’s for another post!