Trading without a Stop Loss: 3 Alternative Methods to Limit Losses in the Market
One of the first rules of trading on the currency market, which is persistently put in the trader's head, is the obligatory setting of a stop-loss order to limit his possible loss if the price goes in the opposite direction to the open trade. There is no doubt that one of the most important qualities of a trader is the ability to manage his losses. Nevertheless stop-loss is not the only way to limit possible losses from trading on the currency market.
Classic stop loss on - a crowd trap
The main problem stop loss The standard rules for setting them, such as above or below local extrema, support or resistance levels, and so on. Most non-professional traders place their stop losses according to these standard rules. In turn, market makers, often, use it for their own benefit. Often in the market you can observe the following picture - before the main price movement begins, the price makes a sharp jump in the opposite direction, "knocking out" the standard stop-loss, and only after that it moves in the right direction. This phenomenon is known among traders as "stop hunting" or "stop hunting. As a result, most traders who have correctly calculated the market situation and opened a position in accordance with the classical rules of technical analysis, instead of profit receive a loss.
Alternative methods of loss limitation, mainly, imply some "multi-way combinations", according to which the initial position has a relatively small volume. Then, as the market situation develops, the position size grows. As a result, the trader gets a distributed position consisting of a number of orders with different opening prices, different volumes and, sometimes, different directions.
Consider several alternative ways to limit losses in the market .
1. The method of locking positions (installation of "locks")
Locking (from the English word "lock" - to close) on implies opening a second position with the same volume, but in the opposite direction to the first position. The opposite position can be opened manually or using pending SellStop or BuyStop orders. As a result, the trader gets two opposite positions with the same volume, the loss is not fixed on the deposit. There are several methods of "locks" opening, description of which deserves a separate article. As a result of competent work with "locks" it is possible to reduce the loss taken on the deposit or even to bring the "lock" to profit.
There are many nuances of position locking (availability and size swapThe following are some of the main factors that we will not consider in the context of this article: the size of the deposit and margin, the preferential use in the flat, and others.
2. Position reversal method
The methodology of using position reversal is similar to locking, but differs in the fact that the position in the opposite direction is opened with an increased volume. Just as in the case with "locks", orders can be opened manually or pending orders can be used. Usually this method is used when trading on levels support or resistanceThe second position, the penetration of which increases the probability that the price will continue to move in the direction opposite to the original position. It is implied that the second position, due to the increased volume and therefore a smaller price movement, can cover the loss incurred on the original position.
3. averaging method
If the price goes against the open position, the averaging technique involves opening a second position in the same direction as the first, but at a better price. As a result, even a small price pullback will allow you to close the total position at breakeven.
Sometimes for the averaging of positions is used Martingale methodThe "open position" method is based on a proportional increase in the volume of each subsequent position opened to reduce the size of the rollback.
Mediation refers to the techniques of counter-trend trading and requires from the trader impeccable self-discipline and a careful assessment of their risks.
Of course, a separate article is needed to describe each method of loss limitation. However, no descriptions and recommendations cannot replace personal experience that can be gained only during practical trading on the foreign exchange market. And in order to avoid overpricing of the gained experience, one can use demo account or a cent account, on which you can get and improve the skills of using alternative methods of limiting losses on .