It's better to use stop-loss orders than not to

Should you use stops or not?

There are still quite a few individuals arguing about this in forex forums. Two things are certain: (1) Banks and forex brokers know exactly at which levels stops are piled up in large amounts. (2) Large market participants are rather fond of the so-called 'run on stops' or 'stop hunting'. The triggering of many stop losses typically leads to high volatility.

Then why should we place stop losses?

Because this way, you would know the approximate size of your potential loss. We say 'approximate' because when the market price reaches the level of the stop loss order, the stop loss order becomes a market order and gets filled at the best price at that moment, i.e. you can get slippage if the market is volatile. If you don't have stop orders, then you have left your position to the vagaries of the market. Placing stop losses is a must-do in order to prevent large losses. Think about what could happen to your position if you do not put stop losses, and your internet connection gets cut off for some reason or your forex trading platform freezes (something that should not happen but does)? Yes, you could probably cover your position by calling your broker on the phone, but how long will it take? Also, depending on your account size, you might not be eligible for phone support. If you haven't placed a stop loss, do you know at what level your position will be closed? When you get a margin call! Do you like getting margin calls?

Plan A and Plan B

In forex trading, as in life in general, it is better to have not only Plan A, but a backup plan as well. Plan A's existence is clear - the goal is to make a profit at a certain price level (that's your Take Profit order). Plan B is your stop loss order. This way, you would have a quantitative grasp of your position and the magnitude of the risk, i.e. if you win - you make x pips, if you lose - you lose y pips, where y pips represent x percent of the balance of your forex account.

In order to have the right attitude and mental setup for forex trading, you would need to have a balanced lifestyle. That's where stop losses come in handy by allowing you to get off your chair and get a life.

Ah, don't fall in for that trick with 'mental stops', i.e. you haven't placed stops on your trading platform but you have them in your mind. What happens many times is that right before and after important economic data comes out, the price rushes like mad in one direction or the other. It then becomes exceedingly difficult, if not impossible, to get your mental stops filled as you get re-quoted a few times before the price settles at a level far away from your mental stop. Mental stops bring about lots of negative emotions and sweating because of hesitation of the type 'Should I close now? No, I'll wait a little bit more, maybe the price will come back. My goodness, what a spike! I'd better close.' You close your position and see how the price comes back. In a nutshell, lots of emotions = lots of losses.