Do you put in a stop-loss order when you make an entry in the Forex market?
Many people may say, “I don’t put a stop-loss order because I cut my own losses when things go wrong.” However, this may lead to unexpected trouble and a terrible loss.
In this article, we will explain the dangers and risks of FX without stop-loss orders and how to prevent them.
What happens if you don’t place a stop-loss order in Forex?
Trading without stop-loss orders in forex, whether day trading or swing trading, is in itself a major risk (danger).
To help you understand this, let me give you some examples.
Cases in which the company continued to hold without knowing the announcement of important indicators, resulting in a loss
If you were unaware of the release of an important economic indicator, it suddenly moved in the opposite direction in a big way, resulting in a terrible loss. ……
This is a typical Forex beginner’s experience.
In other words, since the U.S. employment data moves so much, it is not a good idea to keep your positions open past the announcement time of 9:30 p.m., right?
Yes, it is.
If you do that, you will have a big unrealized loss when it moves several tens of pips at once. If the size of your position is too large, there is a risk of forced loss cut by the FX company if you make a bad move.
Therefore, when an important indicator is about to be announced, it is safe to close your position in advance.
For example, it is recommended to set a rule such as “close positions 15 minutes before the release of an indicator.
However, it is not recommended to stay until the last minute.
This is because there are cases where the market suddenly starts to move as early as a few minutes before the announcement, although we do not know whether this is due to a leak of the announcement content or whether a slight movement has caused a collective psychological panic.
If you lose focus in the middle of the night and are in a daze, ……
You might say, “I have a perfect grasp of important indicator announcements, so I should be fine.” Well, how about this case?
That day, there was movement after 2:00 a.m., so you continued to trade in a lazy manner.
You are indeed sleepy, but the day seems to be going well and the total is positive (profit).
You rubbed your sleepy eyes and continued to trade more, saying, “I’ll take what I can get when I can get it! and continued to trade.
How much time has passed?
I was staring at the chart in a daze because the buy position I had just entered was not moving, when suddenly the chart started to fall so hard that I thought it was broken.
What is this? The rate of the market dropped so fast that your buy position quickly turned into a huge unrealized loss, and finally you were forced to cut your losses.
Inadvertently forgot the FOMC (US policy rate announcement) and lost money!
That’s right. The big move was due to the FOMC’s 3:15 a.m. release of the U.S. policy rate.
What a pity that I inadvertently forgot the release time of such an important indicator and ended up crying a big loss. ……
But we are human beings, so there is always a chance of this happening, and especially in the middle of the night, no matter how careful we are, we have physical limitations.
Please refer to the following articles that explain other dangers and how to respond to the announcement of important economic indicators.
There are still cases where sudden rate movements can cause losses
You may be thinking that all you need to do is to pay attention to the release time of important economic indicators and focus only on the indicator announcements. In fact, however, there are many other risks that can lead to large losses due to sudden rate movements.
Impact of sudden “key figure statements”
For example, let’s say that one day the Prime Minister suddenly makes a statement that “the Japanese yen is too strong and I think it is a problem, so we are considering how to deal with it.
Then the FX market may start to move at once in response to the news. It is truly a “shot in the dark” situation, and the market is likely to panic temporarily.
In such a situation, what will happen if you hold a position without a stop-loss order?
If you are unlucky and the market moves in the opposite direction, you may end up with a forced loss cut in no time.
Impact of serious incidents, accidents, and natural disasters
A coup d’etat or other political upheaval in some country, a missile strike, or a natural disaster could cause the market to overreact and panic.
In the past, there have been sharp rate fluctuations due to North Korean missile launches and the Great East Japan Earthquake.
No one knows when, where, or how something will happen or what impact it will have.
And because we don’t know, when it does happen, people are anxious and fearful, and the market falls into a state of panic.
Central Bank Moves Shake Up FX Market
There is another factor that should not be forgotten when considering the possibility of sudden rate movements.
That is the movement of the central banks of each country.
In principle, the announcement of each country’s policy rate has a fixed schedule, but the market may react suddenly to statements by key figures on monetary policy or leaks of details.
The most common type of such movement is related to foreign exchange intervention (currency manipulation).
In recent years, intervention seems to have become less visible, partly because of its limited effectiveness. Nevertheless, when such rumors or moods emerge, the FX market becomes very sensitive.
In such a situation, the market tends to fluctuate wildly and holding a position without a stop-loss order is a big risk and is not recommended at all.
A typical example of this was the Bank of Japan’s currency intervention in 2011, when it tried to weaken the yen against the speculatively overvalued dollar.
Example of a special and dangerous move by a central bank – Swiss franc shock
There is an example that cannot be dismissed when considering sudden rate movements due to the actions of central banks in various countries.
This is the so-called “Swiss franc shock.
In September 2011, the Swiss central bank began unrestricted currency intervention to prevent the appreciation of its currency, the Swiss franc.
Then, in January 2015, the FX market was hit hard.
The Swiss central bank suddenly and without warning announced that it would stop its currency intervention, causing the Swiss franc to fluctuate by as much as -40%.
The Swiss franc shock is explained in detail in the following article.
In this “Swiss franc shock,” a large number of investors suffered huge losses, and some FX companies even went bankrupt.
However, even in the midst of this historic upheaval, there were cases where traders who had placed stop-loss orders were able to escape the difficulties, which brings up the fact that “we had a major accident, but thanks to stop-loss orders, we managed to survive.”
If, in such a situation, you have suffered an unsatisfactory loss after having placed a stop-loss order, you can contact a consultation service such as FINMAC.
Risks of not placing stop-loss orders in FX and how to prevent them – Summary
I hope that the previous contents have given you a concrete picture of the dangers and risks of continuing to trade without stop-loss orders in the Forex market.
To avoid these risks, it is effective to make simple actions a habit.
The recommendation is to place a stop-loss order at the same time as the entry order
The recommendation is to place a stop loss order at the same time as the entry order.
Specifically, when you place an entry order, you should also place a “stop loss order” on the order screen.
This loss-cut order is set as an absolute line of defense to ensure that losses will not increase any further.
Therefore, it is necessary to determine the allowable loss amount per trade in advance.
Please refer to the following article for details on how to determine the allowable loss amount.
Reference 大事なのはレバレッジの倍数ではなく、具体的な損失額を想定しておくこと
This order will act as your seatbelt and protect you from an accident if one should occur.
With this “stop loss order” seatbelt, you should be able to use your own judgment in timing your stop loss.
This is all I have to say about the dangers of the risk of not placing a stop-loss order in FX and how to counteract it.
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