Using stop-loss orders in Forex trading is one of the most frequent
questions among the novice traders. Should I use stop-loss orders and
how often? There is no definitive answer to this question in open
sources, which is why Traders Union experts decided to conduct their
own research to find out how often successful traders use stop-loss orders in their trading and how important it is for building a trading strategy.
In order to obtain an unbiased and fair answer to the question of the
research, the team of TU analysts surveyed 1,500 successful traders,
trading with the top brokers from among the TOP 10 of the TU’s rating.
As a result, objective, reliable data were received that reflect the
opinion of successful traders, using different trading strategies in
the Forex market.
The conducted research answers the following questions:
What is a stop-loss order?
What types of stop-loss orders are used in the Forex market?
Opinions existing in open sources on the topic of the
research.
Do experienced traders use stop-loss orders in long-term and
short-term trading strategies?
Should I use stop-loss orders in my trading strategy?
The traders from across the world will be able to use the results
of the research for successful trading.
Glossary
Forex is a global financial market for exchanging
currencies. The participants of Forex trading include central banks
of different countries, companies, top international businesses,
commercial banks and private traders.
Forex broker is a financial services company
performing the function of an intermediary between the buyer and the
seller of currency in the Forex market.
Stop-loss order is an order placed with an
objective to limit losses once a specified price is reached.
Trade deposit means the funds deposited by a trader
to his/her account with a Forex broker.
Volatility is a term used to describe fluctuations
of trading prices within a specified period of time. It is believed
that the higher the range of price fluctuations, the higher the
volatility.
Slippage is the difference between the expected
price of a trade set by the trader and the price at which the trade
is executed.
Spread is
the difference between the best buy price and the best sell price in
currency exchange.
Opinions of well-known traders about the use of stop-loss orders
When studying the issue of using the stop-loss orders in the Forex market,
TU experts analyzed open sources, including opinions of respected traders
of the past and the present (Alexander Elder [1], Larry Williams [2],
Jesse Livermore [3], Jack Schwager [4], John Murphy [5]), and also
articles on the popular websites (investorplace.com [6], seekingalpha.com
[7], marketwatch.com [8], etc.). TU analysts have reached a conclusion
that there is no agreement of opinion regarding the use of stop-loss
orders in the strategy in the open sources. Well-known traders, such as
Alexander Elder, Larry Williams, Jesse Livermore, Jack Schwager and John
Murphy believe that the stop-loss order is an essential instrument for
building a profitable trading strategy. Financial experts, however, such
as Matt McCall, Dan Moisand and Dane Bowler believe that stop-loss orders
are not only unnecessary, but they inflict damage on the trading in the
financial markets.
For example, in his book Long-Term Secrets to Short-Term Trading, Larry
Williams, world champion of trading, recommends setting the stop-loss
order once the price breaks the local peaks and not to risk more than 2%
of the deposit.
Larry Williams
At the same time, well-known trader Jesse Livermore, the Great Bear,
claimed that the stop-loss order needs to be set at no more than 10% of
the deposit.
Jesse Livermore
In his Triple Screen Trading System, Alexander Elder says that the
stop-loss order on an open position should be 3 times lower than the
expected return and should not exceed 2% of the deposit. At that, in
case the price moves towards return, the stop-loss order needs to be
shifted to break even, i.e. use the trailing stop-loss.
Alexander Elder
Financial experts Matt McCall, Dan Moisand and Dane Bowler have a
different opinion. They believe that the use of stop-loss orders is not
only unnecessary, but also harmful for trading in the financial markets.
In this articles, Matt McCall, President at Penn Financial Group
states [9]:
Matt McCall
... I often get asked at what level should a stop-loss order be set? At
what price? Or at what percentage pullback? My answer is always the same
… do not set one. Nearly every investment professional will tell you
that it is imperative to use a stop-loss order to protect yourself from
sudden losses. I completely disagree….
Dane Bowler [10], Director of Analytics at 2MCSC, agrees with him:
Dane Bowler
...We see stop losses and other triggered actions as the equivalent of
hiding under a blanket. They may make one feel better, but they do not
provide any measurable risk mitigation. In fact, they seem to increase
risk as they have the potential to force trades at adverse prices...
Dan Moisand [11], Financial Planning Expert at Moisand Fitzgerald
Tamayo, also shares the opinion of the stop-loss order opponents:
Dan Moisand
...While the term “stop-loss” sounds perfect for value preservation, in
practice it is not great...
TU experts have set a task to find out which of the above opinions is true
and whether stop-loss orders should be used when building a trading
strategy.
Theoretical part of the research
Stop-loss order is primarily designed to minimize the losses once the
price of a financial instrument (asset) moves in the direction of a loss
after the trade was opened. Once the price of the asset reaches the
stop-loss level, the opened position will be exited automatically. For
exiting long positions, the Bid price (demand price of the asset) is
always used, and for short positions – Ask price (supply price). When the
stop-loss order is executed, the whole position, for which it was set,
will be closed.
There are a fixed stop-loss and trailing
stop-loss orders:
A fixed stop-loss order can be based
on the following:
Stop-loss based on a trading pattern or price channel.
The stop-loss order is set under the minimum (over the maximum)
of the trading pattern or just outside the price channel. It
implies that when the price goes beyond the pattern or channel,
the price will continue to move in the unprofitable direction.
Therefore, it is believed that the trader is better off closing
such a position.
Stop-loss based on volatility.
It is set based on the average volatility, typical for the
financial instrument in the recent period. This type of fixed
stop-loss order implies that if the volatility of a financial
instrument rises sharply, then it is better for the trader to
register a certain loss and exit the trade. After all, there
have been market events or some news that the trader could not
have foreseen when opening this position.
Stop-loss based on pips or percentages.
Day traders are the ones who use this type of stop-loss orders
most frequently. It is implied that the trade will be closed, if
the price moves towards a loss by a specific number of pips or
percent.
Trailing stop-loss order is always
set at a certain distance (in pips) from the position opening
price and is shifted (trails) along with the price, if the price
moves towards a profit. If the price reverses, the trailing
stop-loss order is not shifted, and the trade is closed with a
profit. Trailing stop-loss order is
believed to be a good alternative to the
fixed stop-loss order.
NOTE:
TU experts note that when setting the stop-loss order, a trader needs
to take into consideration the spread and the possible slippage during
execution of such types of orders.
Results of the research by TU Research Department (*)
To answer the question of whether it is worth using the stop-loss order
when trading in the Forex market, the team of TU analysts surveyed 1,500
successful traders – members of the TU community. The survey was conducted
using CAWI (Computer Assisted Web Interviewing) method. The non-sampling
error of the survey with a confidence level of 0.95 is no more than 2.5%.
The respondents from different countries were offered to fill out a
structured questionnaire, sent to them via email. All surveyed traders
have shown profitable trading for at least one year. Among the respondents
who participated in the survey, 77% were men and 23% were women.
Picture 1. Respondents by gender, %
In terms of their trading experience, the composition of the respondents
was as follows: 3% of the respondents have been trading on Forex for over
10 years, 26% – more than 5 years, 42% – from 3 to 5 years and 29% – from
1 to 3 years.
Picture 2. Respondents’ trading experience, %
According to the survey, the average monthly deposit growth for the last 6
months among the surveyed traders is as follows:
2% of respondents have shown an average monthly return of up to 15%;
14% – up to 10%;
34% – up to 5%;
32% – up to 3%;
18% – up to 1%.
Picture 3. Average monthly return rate of successful traders, %
The responses of the respondents regarding their trading strategies were
as follows:
48% of the respondents use long-term strategies;
52% – intraday.
Picture 4. Long-term or intraday trading strategies, %
To the question:
“Do you use stop-loss orders in your trading strategies?”, the respondents answered as follows:
Use of stop-loss orders
Votes
%
Yes, I do
960
64%
No, I don’t
329
22%
I use stop-loss orders sometimes
211
14%
Total
1,500
100%
Table.1 Use of stop-loss orders in trading in the Forex market.
64% – Yes, I do use the stop-loss orders;
22% – No, I don’t use the stop-loss orders;
14% – I use the stop-loss orders sometimes.
Picture 5. Use of stop-loss orders in trading strategies, %
The respondents who ‘use’ or ‘sometimes use’ stop-loss orders were
also asked what type of stop-loss orders they use. The answers were as
follows:
Types of used stop-loss
Votes
%
Fixed
550
47%
Trailing stop
339
29%
Both types
282
24%
Total
1,171
100%
Table 2. Type of used stop-loss.
Among those, who use stop-loss orders in trading in the Forex market:
47% use fixed stop-loss orders;
29% using trailing stop-loss;
24% use both types of stop-loss orders depending on the market
situation and the size of the open position.
Picture 6. Types of used stop-loss orders, %
(*) Survey criteria
Survey audience: Forex traders of the TU community aged 18 and older
trading with the brokers from the TOP 10 list of TU.
The sample is representative in terms of age, gender and Forex
trading experience.
Sample number: 1,500 respondents.
Survey method: CAWI (Computer Assisted Web Interviewing).
Non-sampling error of the study with a confidence level 0.95: no
more than 2.5%.
Period of survey: May 11-12, 2023.
Findings
In summary, the findings of the research conducted by the TU experts
are as follows:
1
An overwhelming majority of successful traders use (or partially
use) stop-loss orders in their trading strategies, specifically
78% of the respondents.
2
Most frequently, the surveyed traders use fixed stop-loss orders
(47% of the respondents, who use (or partially use) stop-loss
orders, which is 37% of the sample number).
3
The traders who prefer long-term trading strategies use fixed
stop-loss orders more often.
4
Traders who prefer short-term trading strategies use both types
of stop-loss orders depending on the market condition and the
opened trading position.
5
The results received in the course of the research do not depend
on the gender of the trader and their trading experience in the
Forex market. The majority of men and women, regardless of their
trading experience, are of the same opinion: one should use
stop-loss orders when trading in the Forex market.
PDF version of the TU research
For more detailed information on the best time to trade forex,
download the full version of the research conducted by our team.
Stop-loss is considered a good instrument for limiting losses both in
a specific trade and for the whole deposit in general. Stop-loss is
also an important part of building capital management strategy and
calculating the maximum value of a trading position.
We need to keep in mind that not all trading strategies envisage the
use of stop-loss orders. For example, when trading using the
Martingale strategy, stop-loss is not only useless, but also damaging.
One should also remember that when setting the stop-loss order, the
spread and the possibility of a slippage need to be taken into
consideration.
Correct setting of the stop-loss order allows traders not only to
limit their losses, but also alleviate emotional stress, as the
maximum possible loss from a trade will be known in advance. Use
stop-loss correctly and your deposit will always be protected against
big losses!
Background info
TU research is a result of many days of hard work by our experts, who
collected, processed and analyzed a huge amount of information and
opinions on the use of stop-loss orders. Our data are also largely
based on the success stories of real traders, who work with TU, which
confirms their objectivity and impartiality.
Our research is of a charitable nature and was created at the expense
of Traders Union with the objective of increasing financial literacy
of Internet users and increasing the percentage of successful
transactions among traders. If you enjoyed our research and found it
useful, please share it with others.
Chinmay Soni is a financial analyst with more than 5 years of experience in working with stocks, Forex, derivatives, and other assets. As a founder of a boutique research firm and an active researcher, he covers various industries and fields, providing insights backed by statistical data. He is also an educator in the field of finance and technology.
As an author for Traders Union, he contributes his deep analytical insights on various topics, taking into account various aspects.
Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.
The topics he covers include trading signals, cryptocurrencies, Forex brokers, stock brokers, expert advisors, binary options. He has also worked on the ratings of brokers and many other materials.
Dr. BJ Johnson’s motto: It always seems impossible until it’s done. You can do it.
Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO). Mirjan is a cryptocurrency and stock trader. This deep understanding of the finance sector allows her to create informative and engaging content that helps readers easily navigate the complexities of the crypto world.
