Started by PocketOption, May 18, 2022, 06:18 am
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One of the “golden rules” of Forex trading is to always use a stop loss. But is a stop loss always necessary? Certainly not.
Forex can be traded without a stop loss, while still using proper risk management, through the use of hedging. By not using a stop loss, traders can avoid getting stopped out by rollover and volatile market conditions.
See hedging in action in this video. Don't get me wrong, stop losses are an excellent way to limit risk.
But there's a more creative way to limit risk and make money on both sides of the market.
But like with anything else in life, there are trade offs.
The solution to trading without stops, while maintaining proper risk management, is to use hedging.
When you hedge, you hold long and short positions at the same time.
A hedge effectively acts like a stop loss, but also allows you to potentially profit on both the long and short sides, as price moves up and down.
Before you write this off because you're in the US, this can be done in a US account. You just have to know a couple of tricks, which are perfectly legal.
The first trick is that you have to separate your longs and shorts into different accounts. Many brokers make it easy by allowing customers to open multiple accounts or sub accounts.
Another thing that you have to do in order to hedge in a US account is to enter position sizes that are different. Using nano lots makes this easy, without taking on necessary risk.
When you do these 2 things, it's easy to hedge, even if you're in the US. To learn more about how to hedge in a US account, read this tutorial.
Stop losses work well for most traders. but there are a couple of reasons why you might not want to use a stop loss. Let's go over them here.
When the New York session closes, the spread increases significantly for about 30 minutes. Here's and example of how this works. The red and blue horizontal lines are the bid and ask lines.
After New York closes, the lines are close together. The box on the the right side is an indicator that shows end of the New York session.
But during rollover, which lasts for about 15-30 minutes after the NY close, the distance between the lines expands significantly.
You can see how many pips the spread typically is during these times, by looking at a historical spread tracker like this one. The spikes show the rollover times.
Ask your broker if they provide this data.
When price is really close your stop loss and rollover kicks in, you could get stopped out. If you have a pending order open, your order could also get executed.
So you need to understand when this happens and how wide the spread can get on the pairs that you're trading.
If you don't like the feeling of losing money when you get stopped out, hedging provides an excellent way to flow with the market.
You can scale in and out of your positions, without having to use a hard stop loss.
Of course, this is assuming that you manage your positions correctly.
You can limit your risk without a stop loss by using Forex hedging. This type of hedging works best in Forex.
I don't know of any other market where it's so easy to incrementally close and add to your trading positions.
To get started with hedging, get our free Forex hedging PDF guide.
So as you can see, it's possible to trade without a stop loss, while still managing your risk.
For most traders, the best way to manage risk is to use a stop loss. But some traders like the flexibility that hedging can provide.
The herd (most people) will tell you that you always need a stop loss. As I've shown here, that's not always the case. Learn to be an independent thinker, and you'll spot opportunities that others are missing.
If you want to learn more details on how to hedge, keep an eye out for our new Zen8 Forex Hedging course that will be coming out soon.
The post How to Trade Forex Without a Stop Loss appeared first on Trading Heroes.
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