One of the biggest myths in foreign currency trading is
that price is predictable and that for every level that
price has visited, it will revisit that level again.
If you are a regular reader of my articles, you will be
aware that as the result of my trading system support
service, I get asked a lot of questions.
One particular question that I am asked on a fairly regular
basis is - "Do I really need to use a stop loss? After all
price always returns sooner or later doesn't it?"
Well no actually, it does not, but I can see why I am often
asked this question.
Price is very capricious. Price loves nothing better than
to lead us traders into a false sense of security, take all
of our hard won money, and then to smile sweetly over it's
shoulder as it waves us goodbye.
What do I mean by this?
A recent question that I received sets the scene quite
nicely:-
"Why is it necessary to set a stop loss? I have been
setting stop losses as detailed in the trading system, but
I find that sometimes I get stopped out and then price
moves back in the original direction and makes a lot of
pips. Even when price runs against me it nearly always
comes back".
Did you spot the dangerous word in that question?
It is a strange phenomenon that we traders fool ourselves
into believing something to be totally true, when in fact
it may only be true most of the time, and in trading, this
could be a very costly mistake.
Well, if you haven't guessed, the dangerous word was
"nearly".
You see, if price ALWAYS came back, we could - given deep
enough pockets - hold on in there, watching our losses
grow, but certain in the knowledge that sooner or later we
would see those losses reduce and then turn to profit.
This does happen quite often, but quite often is not often
enough because if we are prepared to let our loss run, at
some point the loss will keep on increasing until we are
completely out of funds, at which point we will be forced
(possibly by a margin call) to liquidate our position and
this will likely more than wipe out the other times when we
profited from price making a return to the levels that we
had hoped for.
Price can come back nearly every time, but it only has to
fail to do so once to wipe you out if you do not use a stop
loss.
Setting a stop loss is a very sensible and essential thing
to do.
Setting a stop loss should be an intrinsic part of your
trading method. You should be in the habit of setting your
stop loss on every single trade, at the same time that you
place the trade.
Selecting your stop loss position is something that should
be calculated prior to the placement of your trade, and you
should at that time also consider the amount that you are
about to place at risk in relation to your money management
objectives.
Sure, sometimes you will get stopped out for a small loss
and price will then carry on in the direction that you had
hoped, leaving you on the side lines. On these occassions
you will not gain all of those pips of profit.
In the long run though, setting your stop loss will keep
you in the game, and staying in the game will allow you to
make your profits from the many times when price moves just
the way that you want it to.
----------------------------------------------------
Martin Bottomley is a full time professional forex trader,
acknowledged author, forex tutor and co-developer of forex
trading software including The Amazing Stealth Forex
Trading system.
You will find more information at:
http://www.stealthforex.com
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