When Should You Get Out of a Bad Position?

Trading without stop loss is the biggest mistake a trader can make. This is what you read on any website, weblog, article, e-book and… . Although they do know that this is a big mistake, almost all novice traders make this mistake at least once. Most of them repeat this mistake for a few times and they wake up when they have already blown up a few accounts. Most of them give up for good because they have no money to trade anymore or they are emotionally hurt and they do not dare to try Forex trading anymore. Some of them do not like to give up because they still think that Forex can make money for them, but they become skeptical if it is really possible to make money through forex trading or not.

Stop loss is the most important thing in trading. It does not let an ordinary trading mistake become a disaster and trauma. So never even think about trading without setting a proper and reasonable stop loss. How and where you should set your stop loss is something that can not be discussed here and I have already published an article about it. I recommend you to read that article and also the money management article very carefully. If you always trade with a proper stop loss and you follow the money management rules, you will never give up on Forex trading and you will become a profitable Forex trader finally. This is the Forex trading top secret. The Forex key secret is not a special trading system that makes you a multimillionaire within a very short time. There is no such a system. The Forex trading key secret is in money management and stop loss setting.

You take a position without any stop loss or you initially set a stop loss, but you remove it when it is about to be triggered. You do not want to end a trade with a loss and so you remove your stop loss and you think it will move to your direction and you will have the chance to get out at breakeven. Now your position is 400 pips against you and you don’t know what to do. Sometimes you decide to close it, but as soon as you want to do it your inner demon says “what if it moves to your direction after you close it with a 400 pips loss?”. So you don’t close the position and you decide to wait more. Finally you get out of the trade because there is no more money in your account. You get margin call and your position will be closed automatically.

Some traders blow up their accounts several times just because when they want to close a losing trade something whispers that “what if it turns around after you close it?”. They don’t close their trades and they let their account to be wiped out just because it is too hard for them to see the market turns around after they get out of a losing trade. Maybe they have already experienced that if they had not closed a losing trade, they could have the chance to get out at breakeven or even with some profit. So they decide not to close their losing positions and wait for them to turn around.

Now the question is what happens if the market turns around and moves toward your target after you close your losing position or after hitting your stop loss? Nothing important and critical happens. You just lose some money. But what happens if you don’t close your losing position and it keeps on moving against you? You lose all the money you have in your account. Believe it or not, but I have seen someone who lost 7 million dollars because of the same stupid mistake. I still have his statements. He took a position without setting a stop loss. It went against him very badly. He hold the position and then added to his wrong position (averaging down) which is even a bigger mistake than trading without stop loss. After a while he had four 200 lots losing positions all against him and finally he lost all he had in his account. He lost all he had just because he did not want to have a losing trade or he also did not like to see the market turns around and leaves him a losing trade, after closing his losing position.

In contrast, there is another trader, Dan Zanger, who turned 10,000 dollars into 42 million in 23 months. Do you think he doesn’t have any losing trade at all? Of course he does, but he lets a wrong position be closed by a proper stop loss. He could not make 42 millions dollars if he had got married with a losing trade and let it drain all the money he had in his account.

What should you do if you make such a mistake?

If you have taken a position and it is moving against you while you have no stop loss, you should close it as soon as possible. Ask yourself where the stop loss of such a trade should have been placed. Then if the price has not reached the stop loss position yet, set your stop loss immediately. If the price is beyond the stop loss, then close your position immediately. Yes, it is possible that the market turns around as soon as you get out, but it is ok. You never know. You can still trade and recover your loss if there is some money left in your account. But if you lose all your money, you may not be able to trade anymore.

I have seen some traders who check the bigger time frames when their positions go against them. They trade intra-daily using a small time frame like 15min, but when their positions go against them, they check the bigger time frames like one hours or 4hrs and convince themselves that although the position (which has been taken based on the 15min chart) is against them, the one hour and 4hrs charts are in the right direction and they can get out without any loss very soon. Then when the market keeps on moving against them, they refer to daily and weekly charts. Someone who wanted to be an intraday trader, becomes a swing trader. A 15min position which can not lose more than 50 to 80 pips maximum (depend on the currency pair), is now 500 pips in loss. If your position is taken based on a special time frame and it is against you, you should close it based on the same time frame. You should not hold it just because the bigger time frames show some agreeable signals. If the time frame that you took your position based on, has changed the direction and is completely against you, you should be OUT as soon as possible.

You Are Either Right or You Should Be Out!

The bottom line is do not trade without stop loss. Enter the stop loss value before you click on the buy/sell button. Do not set the stop loss after taking the position. Set the stop loss at the same time, because you may not be able to edit your position and set the stop loss later.

Further Reading: Before leaving our website, please take a look at the other articles we have published.

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