Stop loss is a great tool to protect trades from losses, but is it possible to make profit without one? What are the alternatives that we have?

Trade Without Stop Loss

The forex market can often be highly unpredictable, so even professional traders make inaccurate predictions at times and end up getting losses instead.

For this reason, traders need some strategy or mechanism to help them minimize the risk. One of the best-recommended tools for that purpose is the stop loss. Most traders rely on stop loss a lot, and some even believe that trading without a stop loss is straight-up disastrous.

So, is it possible to trade and earn profit without a stop loss?

The answer is yes, you can still trade and win without a stop loss. But that doesn't necessarily mean that you should just wing it and boldly enter the market without any risk management.

In fact, you need to be really careful with your moves and prepare an equally strong alternative strategy. This article will explain the reasons why trading without stop loss might be a great idea and how to make a profit out of it.

 

Reasons for Not Using Stop Losses

While stop-loss orders can be a useful risk management tool in trading, there are a few reasons why some traders choose not to use them or may be cautious about relying solely on stop-loss orders:

 

Brokers Might Take Advantage of Your Stop Loss

If you're trading with a dealing desk or market maker, then you might want to consider trading without stop loss for several reasons.

First of all, market makers create their own market by buying or selling assets according to publicly quoted prices and providing liquidity to the market.

That being said, the broker might hedge, pass your order to someone else, hold your order, or even decide to trade against you. And when they do take the opposite position of the trade, then that means your loss is their profit.

By putting a stop loss order, you are basically "telling" the broker about your exit plan, which grants them an unfair advantage in the trade.

In this case, forex dealers may widen the spread to catch the stop loss and make you pay more than anticipated. Market makers certainly have the power to do so if they really want to.

Brokers like this are known as "stop loss hunters".

 

Stop Loss Can Be Triggered by Temporary Price Spikes

We have briefly mentioned that the forex market is not easy to predict. There are times when you successfully make accurate predictions and the price moves in the expected, profitable direction.

Some other times, you might find the price moves in the opposite way, going further from the direction that you intended. In this case, using a stop loss can be really helpful to save your funds.

However, please note that the forex market is typically volatile. That means sudden spikes on single candles are pretty common in the forex market.

Sometimes, the price may even make a false breakout before eventually reversing a little while later. The problem arises when the false breakout hits your stop loss.

In this scenario, you will miss a potentially huge profit opportunity because your trade is stopped too early by the stop loss.

 

Stop Loss Can Make You Careless

The primary purpose of a stop loss is to protect traders from losing too much money in a single trade. So in many cases, traders would see stop loss as a safety net that can save them from any danger.

Unfortunately, this is not entirely true. Traders who are over-confident with their trades and fully rely on stop loss to save their money tend to make sloppy predictions and trade rather carelessly.

On the other hand, traders who trade without stop loss usually make better trading decisions and have good money management because they're always aware of the risks in the market.

 

It Doesn't Work During Slippage

Last but not least, we should not ignore the fact that slippages are more likely to occur in high volatility markets such as the currency market.

Despite being seen as a safety net, stop loss is only as good as the broker's ability to close the trade at your intended price. When slippage occurs, the broker will execute your trade at a completely different price level and thus, ruin your whole initial trading plan.

Don't be surprised if the broker executes your stop loss at a level far from your previous target.

 

How to Trade Without Stop loss

There are numerous ways to try if you want to trade without a stop loss. This time, we're going to be using 2 Exponential Moving Averages (EMAs), the 7 EMA and 14 EMA.

Though pretty simple, the strategy might be able to help you earn considerable profits if done correctly.

However, like any other strategy, there is no guarantee that it's going to be successful at all times, so it's advisable to try it out on a demo account first.

Also, always keep in mind that trading without stop loss will increase the risk and should be done with full consideration and careful testing.

 

Rules for Long Position

  1. Wait until the 7 EMA crosses over 14 EMA from below. This shows that the market trend shifts to the bulls' side.
  2. Make sure only to look for buy opportunities. Open a buy order when a bearish candlestick forms a new lower low.
  3. Since we're not using stop losses, exit the trade immediately if the bearish candlestick goes lower than the 14 EMA line.

Take a look at the illustration below:

USDCAD

From the chart above, it appears that the market price is in a strong uptrend. There are a total of six buy entries, with four winning positions and two losing positions.

The losing positions happened because the trading rule requires us to exit the trade when a bearish candle forms and closes under the 14 EMA line.

 

Rules for Short Position

  1. Wait until the 7 EMA crosses over 14 EMA from above. This shows that the market trend shifts to the bears' side.
  2. Make sure only to look for sell opportunities. Open a sell order when a bullish candlestick forms a new higher low.
  3. Since we're not using stop losses, exit the trade immediately if the bullish candlestick goes above the 14 EMA line.

Here's an example:

EURUSD

The chart above shows that after the 7 EMA line crosses the 14 EMA from the upside, that the market trend changes to bearish.

Similar to the buying setup, there are a total of six sell entries, with four winning positions and two losing positions.

The losing positions happened because the trading rule requires us to exit when a bullish candle forms and closes above the 14 EMA line.

 

Bottom Line

Stop losses exist because we simply can't see the future. Regardless of how expert you are at trading or how strong your trading plan might be, future currency prices are always unknown to the market, and all trades are at risk.

Thus, many traders like to use stop loss as a way to assure themselves that the trade is safe and ready to exit anytime the price hits the red zone.

The same argument can be made for taking profit orders, which make sure that the trades exit when the price hits a certain level; all according to plan.

However, stop losses are not fully flawless and sometimes can be the reason for a trader's loss. Ironic, isn't it? This is why not all traders use stop loss in their trades.

There are many alternative ways or strategies to manage risk other than the one mentioned in this article, such as hedging, options, scalping, and more.

All in all, the main thing to consider is that trading without a stop loss is very risky. This is why the strategy is more advisable for expert traders with enough knowledge and experience in the market.

If you want to try it, make sure to weigh the pros and cons and try the method in a demo account before opening a live trade without stop loss.

Lastly, keep in mind that this strategy will require you to spend more time in front of the screen and make quick decisions along the way.