Overwhelming losses in the market
Money management is one of the cornerstones of trading on , and without following its rules, profitable trading is simply not possible. Whatever your trading strategy, your profits will depend on how you manage your trades and limit your risks.
Two tactics for dealing with losses
There are dozens of money management models, but the approaches to transaction support can be divided into two large groups:
- loss limitation tactics;
- tactics of overstaying the loss.
Everything is clear with the tactics of loss limitation - when opening a transaction, a stop-loss order is placed, which closes it with a fixed loss, if the price goes in the opposite direction from the predicted one.
Overharvesting losses - is such a way of risk management (if it can be called that at all), when in an open trade stop-loss is either absent, or has a very large size, playing a psychological rather than practical role.
As a rule, this approach is used by novice traders who do not have enough practical experience in trading on . And with 100% probability the tactic of overstaying leads to huge losses, up to the point of losing the deposit.
Why don't traders put a stop loss, but try to wait out losses?
For the most part, the overhang of losses is a consequence of the psychological state of the trader. For example, after getting a deal closed on a stop-loss, such a trader does not try to understand - is it possible that the reason is in the wrong entry point, which led to the wrong set stop loss? He gets angry at the market, entering into a confrontation with it - "I'll take my own anyway". Naturally, in order not to get a loss on the stop-loss, it is simply not exposed in the next trade.
It is worth noting that overfreezing of losses is used not only by beginners, but also by more experienced traders in the hope of catching a price reversal. In spite of the fact that overfreezing itself is negative, nevertheless it can be logically explained.
The price of an asset always moves within a range formed by economic and political factors in the countries whose currencies make up the currency pair. The market is in constant motion. The participants of the market move the price of the asset within a certain range. The price can approach its borders and bounce back from them, returning to the starting point. And this process can be repeated many times.
If there is high volatility in the currency pair, then traders do not set a stop-loss, hoping for a return of the price due to the cyclicality of the market.
Four loss waiting options
Loss-foreclosure tactics are quite varied. We will consider four options for its use:
1) The tactic of waiting out losses with a large stop-loss and a small profit
Despite the fact that overlapping losses almost always end sadly, in this form it is very often used in scalping and pipsing.
By opening a position, taking into account the spread, the scalper or the pipsitter already gets a minus, and the slightest price noise increases this minus, closing the transaction with a small stop-loss. That's why scalpers and pipsers often use an increased stop loss that exceeds the take profit order size, sometimes several times over.
The logic here is simple - The probability that the price will pass 5 pips to take profit is higher than the probability that the price will pass 10-15 pips to stop loss.
2) Overlapping losses using Martingale
When using the Martingale method, the trader does not place a stop loss. If the price goes against the trade, the trades are opened in the original direction with an increased lot at the settlement points.
The idea is simple - on a price pullback, an increased lot of trades will allow you to close the entire series of trades even with a small price movement.
Lingering trends or deep no-holds-barred price movements make a difference in the use of this tactic. The trader runs out of money to open the next Martingale trades, because the lot needs to be increased. As a result, prolonged trends lead to a very fast deposit withdrawal.
3) Overlapping of losses by locking orders
A great deal has been said about locks. There are many both opponents and ardent admirers of this method. Recall that when a lock is placed, a stop loss order is not placed, and a trade is opened with the same lot, but in the direction opposite to the original one.
"Dealing" with the lock is much harder than it seems, so, more often than not, the trader does not fix the loss, but tries to find a point for a positive exit from the situation.
As a consequence, the first profitable lock order is closed with a profit, and the second relies on the hope that the market will roll back and the loss will be reduced.
4) Simply no stop loss
This, as a rule, is a sin of many beginners who simply do not know how to calculate the right point to enter the market and, accordingly, to assess their risks.
Having "missed" the right point, such a trader, for example, opens a buy trade in an uptrend not near the support line of the trend, but in the middle of it. A stop loss set below the support line is too large, and if you set it below the previous local low, it is very likely to be hit by a micro-correction in the price.
The way out was found - do not put a stop loss at all, and if anything, close the trade with your hands.
Naturally, no one closes losses by hand, hoping that the price is about to turn around. After a long price movement, such a trader either sinks the deposit, or still gathers his strength and fixes the loss manually, but its size is no longer comparable to that which could have been obtained through a correctly set stop-loss.
Is it even worth it to outlive the losses on ?
The currency market can hardly be called a place where one can wait out losses. High volatility of currency pairs together with a leverage can leave only zeros on the deposit almost in an instant.
Nevertheless, the tactic of waiting out losses is successfully used in the stock market. For example, to receive dividends on shares, as well as at the cut-off, when it is simply necessary to wait out the formed price gap in order to come out with a profit.
Whether to use stop-loss or limit your risks in some other way is a purely personal matter for every trader. No one forbids you to trade without stop-losses, fidgeting in your chair and watching as the negative number in the Profit column increases, and the balance bar turns from gray to red, signaling a close Margin Call. But if you're in it for the money, sitting on losses is definitely not your tactic.