YES! YES! YES!

The quick answer is: “yes.” The long form of the answer is “yes, if you choose not to blow up your Forex trading account.” There are a multitude of reasons for using a stop loss, however there are some techniques that can be deployed to forgo a stop loss, even though it is typically the realm of institutional traders to do things like that.

The stop loss is your best friend, as volatility in the currency markets can pick up at any moment. There can be a shock announcement, some event halfway across the world, or worse yet something going on whilst you are asleep. You genuinely can’t predict the entirety that’s going to happen, so the stop loss is your guardian angel. Looking at the Forex markets, there are a multitude of reasons you ought to see a sudden spike in price.

For example, in the last couple of years we have seen the Swiss National Bank defend the 1.20 level in the EUR/CHF pair, refusing to permit the pair to drop under that level as the Swiss franc had gotten far too expensive. However, on January 15, 2005, the SNB all of sudden abandoned the peg, and enable the market to drop as they had been protecting that level for a couple of years and it had subsequently gotten too expensive. Large amounts of institutional money was once coming in and buying the pair every time it got close to the 1.20 level, because it was “easy money.” However, as soon as the Swiss stepped away from the currency markets, the pair collapsed and fell several candles in milliseconds. Around the world, there were testimonies of retail traders who had refused the common sense of putting in a stop loss and were wiped out.

Imagine being an American trader. You had a function in the EUR/USD pair relying on the Swiss National Bank to protect you. Suddenly, as you awake on January 15, you find out that your account is empty. Your broker is demanding you deposit extra margin, and for some people it was even worse than that: they actually owed their brokers money because orders ought to get filled fast enough.

Granted, this is a very intense situation, but it’s not uncommon for a pair like the GBP/JPY pair to fall 120 pips whilst you are sleeping. Some people use stop loss is as a “disaster stop”, however it’s designed to protect you when your analysis isn’t correct, and let’s be honest – incorrect analysis is truly part of the game.

Stop losses are there for a reason
Not only are stop losses there to protect your account against disaster, but it also represents a “line in the sand” as to where your analysis is proven incorrect. If it is tested to be incorrect, you without a doubt exit the market and understand that you live to combat another day. Unfortunately, far too many of you will be moving stop losses in order to avoid taking loss, but the profitable trader is willing to cut losses rather quickly. Ultimately, the profitable trader is aware that if your analysis is tested incorrect, it’s better to keep your losses very small. However, if your analysis is proven to be the right analysis, moving your stop loss is in your desire to lock in gains is a perfectly applicable strategy. This is allowing the marketplace to tell you when it’s time to get out after a massive run higher.