Copyright (c) 2009 Jay Meisler
I can�t believe I am writing about this again but the recent fall in the dollar has highlighted the need for proper money management and to trade with stops. My focus is the forex market so I can only speak from this perspective but what I say is applicable to not only forex trading but all trading. If you want to stay in the game, trade with stops. I cannot say it any clearer. The aim of this article is to use the current forex market trends as an example of why a trader needs discipline and use stops.
I can�t believe I am writing about this again but the recent fall in the dollar has highlighted the need to trade with stops. My focus is the forex market so I can only speak from this perspective but what I say is applicable to not only forex trading but all trading. If you want to stay in the game, trade with stops. I cannot say it any clearer. The purpose of this article is to use the current forex market trends as an example of why a trader needs to be disciplined and use stops.
It feels like d�j� vu whenever a trend emerges. I get calls from traders asking what they should do with a long or short position that is deep underwater. I always ask the same question, "Where was your stop?� The usual answer is I didn�t use one. I just don�t get it.
Why don�t traders use stops? There is no single answer but one may be a reluctance to take a loss on a position even though taking losses is part of the trading business and an important part of proper money management. This is why �hedging� has become popular on retail forex trading platforms although essentially it is a flat position and more often than not an excuse not to book a loss. This is a topic for a future discussion.
Another reason why forex traders do not use stops may be that the currency market often trades in a range, even during trends when there is consolidation. These ranges can last for days, weeks or months. During these periods, range trading works and hanging on to a position, even one that is underwater, often gives a chance to recover the loss or even make a profit. The problem is when ranges break and trends take over. In breakouts there is often no looking back as a market runs away from the range trader. Those traders who follow a range strategy and trade with stops should be okay. It is the undisciplined trader who trades without a stop that faces disaster, especially in a market, such as forex, that trades with leverage.
Take the current market as an example. Since the start of July and after peaking at 1.6744 on June 30, GBP/USD, except for a brief one-day break of 1.60, traded in a 1.60-1.66 range with most of the activity within 1.63-1.66 since the middle of July. This was a good market for range traders as there was a lot of volatility within this range. However, the market broke the top of the range on the last day of July and continued to climb at the start of August to reach 1.7005 on August 4. For those trading a range from the short side and using a stop, this was part of the strategy as ranges do not last forever. For those trading a range from the short side without a stop, the result could be fatal and the trading account wiped out. Even if you were able to stay solvent without using a stop and the market eventually returned to your entry level, the emotional and opportunity costs were not worth the risk.
I assume there are skillful traders who do not use fixed stops but use dynamic stops or other techniques to manage a position. However, there is no trader I know of who has stayed in the game without employing prudent money management. For the retail forex trader, this means using stops.
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Jay Meisler is a co-founder of
Global-View.com, the leading forex discussion site for more than a decade and where traders from around the globe come for the latest breaking news, flows, rumors and trading ideas =>
http://www.global-view.com
