Why You Don't Need Stop Losses

Mar 28, 2023

Almost as a natural reaction, Traders start in the markets and stick to one thing; using a stop loss. 

This aspect of Trading is almost unfathomable as a removeable part. Often, This forms the 'safety' barrier for most traders and they agree where and when they will liquidate their position give a price move the wrong way. Also just as often, the price point they set is quickly taken out prior to price moving back the way they wanted it. 

You see, the problem with stop losses is simple; it's hard to gauge the probability of every trade in terms of whether you'll get to X before Y and that stops appropriate allocation of risk. In other words, one trade may be more risky than the other but both remain the same in terms of risk, be it in $ / % or however the trader measures it. If it was easy to do, every stop loss and every take profit would be set so money just flowed constantly into the broker account of the Trader.

But that's not reality. Stop losses inappropriately set cause endless and uncontrollable losses for the victim Trader. The false sense of security that comes from a stop loss is quickly removed once more and more trades go bust and equity diminishes before the eventual margin call. Win or lose, this process of experiencing vast losses in long trending markets becomes a real issue.

But, there's a better way (or atleast I think so in my Trading). I removed stop losses and admitted that I will never get the exact price point to the .00001 decimal place and that as a Trader that makes money I will need to get an average price. Instead of taking the approach of in for out at exact pre-determined levels, I use hedging methods to mitigate loss along with DCA and Sentiment planning. That means, any losing trade can be dealt with my taking the opposite side of the market in proportion to my running equity and the mood / risk of the asset at the time.

For example, if I get long on the EUR/USD and the market falls, I know where abouts I will get long for my next entry. If that fails, I repeat the process. Once I get to a point where I'd like to clear up current running drawdown and avoid blowing out, I begin to hedge in proportion to the drawdown accumulated clearing it out. I know if market sentiment changes harshly I can vary my size and hedge up more if I have to.

Repeating this process eliminates the stop loss issue. When the market starts to return, hedge gains eliminate the drawdown incurred and will put me in profit. It really doesn't matter if the price falls tremendously below where I entered because I've pre planned for it at all times (size, hedging zones, DCA zones). Mathematically, I know as long as I achieve sustained gains my running loss will not cause a margin call.

Now this doesn't happen by guesswork and it certainly won't happen overnight. It requires the right tools for the job and the right mentor to teach you. That's exactly what you get at WillOfTheTrader Academy so you can become profitable and trade like a real business.

See you there,

Will S

Founder Of WOTT Trading Academy