Hi guys,
First, I’m sorry if this is a stupid question. I’m a beginner in the forex and I did not find a good answer (for dummies) to this question in the forum.
Let’s imagine that I bought some EURUSD. From what I understand, the “Stop loss” is for limit the loss if the pair value falls until some point. My question is: Why I don’t just wait until the pair value rises to sell it and profit?
Thanks for all,
Cheers,
Multiple reasons, the most basic ones being you’d be margin called at some point and the money can be used somewhere else. Ex: If you have 1 lot tied up in EUR/USD loss for a few months, that’s money you could have traded with (and presumably profited from) but now it’s just sitting around.
In theory it would work but you’d need an insane amount of money to pull it off as some trades could be in a loss for years. If it were that easy, surely everyone would be using this strategy as you would never lose. Basically, don’t try this. It doesn’t end well.
I would say it depends on how long you are willing to wait and what type of trader you are. if you consider a few hours or days an acceptable wait for the market to turn, then do so.
The basic reason is money would be used somewhere but you are pointing you margin some other where. Otherwise there were also many reason existing. In live forex trading you will not apply the theories all the time. But in practical you will need insane amount of money to recover the loss for each year. Also as a new trader you must try demo trading first couple of months. Otherwise in every single step of trading you will get confusion.
Hey Hilty, I have been trading for a few weeks now and I understand where you are coming from. Why wouldn’t you want to wait till you only make a profit on your trades? Well my answer is I usually use stop loss when I actually start getting a profit or when I go to sleep else I keep it out of a stop loss but I always set a take profit just incase it drops without you looking at it. I myself have thought that it was a huge sham that they teach you to always use a stop loss, But now I’m thinking a little differently. Once I start getting profit I usually set a stop loss to keep me from loosing all of it. You control how you use stop loss but this is how I used it.
Oh and also you use it to not fall below margin boundaries or they will close your largest trade out to cover for the cost of the loss.
Hi Hilty,
This is NOT a stupid question at all! In fact it concerns perhaps the most important and relevant principle in trading that one can possibly raise! It is at the very core of trading as a business. It is all about money management.
The key element in trading is recognise that a loss is NOT a mistake or a failure. It is an integral component of trading as a whole.
The central issue in your trading process is not your open position(s) at any one time, it is the overall growth in your capital balance. You cannot grow your capital without trading and some trades will always lose. The key is managing your risk and your capital such that overall your gains exceed these losses - that is the very nature of trading.
One could compare it with a shop. Shops gain from selling products with a mark-up. If they do not buy goods to sell, they will never make a profit. But they always lose something from damaged stock, customer returns, pilfering, unsold stock etc. But this is an integral part of the retail process and is manageable and, more importantly, calculated into the business plan upfront.
Does a retailer hang on to old stock in the hope that it can sell it “one day” in the future? No! it sells it off cheap and clears shelf space for new products that can earn profits!
Traders should think the same. You set up a trade because it meets your entry criteria. You already have a profit target in mind. But if it does not proceed as anticipated then there will come a point where the criteria for having initially entered the trade is now invalidated. The trade no longer meets your set of rules. That is the time to get out and wait for the next set up.
Managing and minimizing the damage from your losing positions is maybe far more important and effective than monitoring your gains. One of the most depressing situations in trading is to build up a profit through hard work and dedication over a period of weeks - only to see it wiped out in a few hours through a sudden move and no damage control in place.
One other serious problem with running losing positions is that they are “marked to market” on a real-time basis. In other words, as your position loss grows more money is locked out of your account equity to cover it. Eventually, if your equity is too little you will have to either keep adding more funds to it or it will be closed and the full loss realised and you account washed away. As a trader, this is a totally destructive scenario where one would be feeding a losing position for months with no opportunity to concentrate on trading!
Here is an example of what can go wrong. Around the start of this year there was a lot of hype about the EURUSD going to par. We were trading in the 1.0400’s. You could have justifiably sold a position here targeting par (red ring on the chart). This is the weekly chart showing what has happened since - ask yourself the question: What would have been better: to still be holding on to that short position nine months later and currently at 1.18 - 1.19 (which might take literally years to return to those levels, if ever, during your trading career) or to have cut the position once your entry criteria was nullified and taken a long position instead? Which of these two scenarios is “trading”?
Edited to add:
There is an interesting additional trading psychology point visible in this chart. If you had stubbornly continued to hold the original short position, you would see 2 dips a few months later. Now, you would interpret these with great relief as possibly reversals which at last were going to get you back to profit with your short. Whereas another trader, who had abandoned the short scenario weeks earlier would be eagerly looking at these as buying opportunites…your losing position is now distorting your analysis and blinding your vision of what is really going on…
Sometimes waiting for the start of a move to be 25-50% in action causes a loss in price value, resulting in missed opportunities and more risk. This is also applied even with a stop loss. However, it’s better to have stop loss in place to reduce risk and reserve your capital. There’s always a chance that price can jump wiping out your whole account.
Bahahahahahaa, yes, and yes. And who pray tell was the winner of the now famous British Show Millionaire Trader, a woman, who was a, get ready, here it comes, SHOP KEEPER. So talk about breaking down stereotypes.
Owning a shop, makes a better trader, oh by the way she beat the living daylights out of a Programmer. 
The Ever Smashing StereoTypes VIPER
Hah! now that is really revealing! 
Now is that a case of the dreaded female intuition or a vote for plain old commonsense! 
It is claimed that the female mind is wired totally differently to the male mind, and can focus on many different things simultaneously whereas the male mind can only deal with one thing at a time…and when he is constantly thinking about that one thing then it is not surprising that his trading is so poor! 
Because, it can take such a long time and I can’t wait for this! Basically, in my trading I set my SL and TP levels according to the position of support and resistance! I use big SL and TP for swing trading, for scalping I use small SL and TP position.
