Securing Trades: Moving Stop Losses to Breakeven Forex Traders

Profitability is the ultimate goal for all traders in the forex market. However, evaluating profitability is not a straightforward task. While many traders rely on comparing the size of their losses to their profits, this single metric alone may not provide enough motivation or a comprehensive understanding of one's success. In fact, solely fixating on this indicator can sometimes trap us in psychological pitfalls.

When faced with a series of unsuccessful trades and accumulating losses, the desire to recoup those losses and attain profits can become overpowering. This intense longing often drives traders to take unnecessary risks and make impulsive trading decisions, driven solely by the emotional need to recover their losses. Unfortunately, succumbing to such emotional pressures typically leads to even greater losses, further intensifying the emotional turmoil associated with trading.

To mitigate the emotional tension and prevent impulsive decision-making, one effective strategy is to employ a technique known as moving the Stop Loss to breakeven. This technique involves adjusting the Stop Loss level to the trade's entry price once a certain profit threshold has been reached. By doing so, traders can secure their initial investment and eliminate the risk of incurring any further capital losses.

Moving the Stop Loss to breakeven serves multiple purposes. First and foremost, it reduces the emotional pressure that traders experience when managing their trades. By eliminating the possibility of incurring additional losses, traders can approach the market with a clearer and more objective mindset. This, in turn, helps to curb emotional biases and impulsive decision-making, which often lead to detrimental outcomes.

Furthermore, moving the Stop Loss to breakeven can provide a sense of psychological relief and instill greater confidence in one's trading strategy. Traders can take solace in the knowledge that even if the trade eventually turns against them, they will not suffer any financial loss. This fosters a more disciplined and strategic approach to trading, as the fear of losing capital is significantly reduced.

Implementing the practice of moving the Stop Loss to breakeven is ultimately a risk management technique aimed at safeguarding traders' capital and minimizing emotional stress. By adopting this strategy, traders can achieve a higher level of psychological stability and make more rational trading decisions. While it does not guarantee profitability on its own, it serves as an invaluable tool in maintaining a balanced and disciplined approach to navigating the forex market.

What Is Breakeven

To comprehend the concept of breakeven, let's delve into an illustrative example. Consider two scenarios where we analyze the market and identify an ascending channel. We wait for a test of the upper boundary and observe a bearish absorption reversal pattern, prompting us to sell EUR/USD with targets near the lower boundary of the channel.

In the first situation, our short position initially brings a profit of approximately 15-20 pips, and our profit expectations rise. However, instead of continuing in our favor, the price abruptly reverses and triggers the Stop Loss order. As a result, a position that had shown a small profit closes with a loss.

At the moment when the price reaches 15-20 pips, which accounts for more than half of the anticipated distance from the order opening point to the Take Profit level, we make a strategic move. We adjust the Stop Loss level below the opening price, effectively securing our position from further loss.

The subsequent price movement can unfold in two possible ways:

1) The price continues its descent and reaches the Take Profit level, resulting in a profitable outcome for our position.


2) The price reverses direction and triggers the Stop Loss order. However, since we had moved the Stop Loss to breakeven, the position is closed not at a loss but at a breakeven point, meaning we exit the trade without suffering any financial loss.



Based on the given example, we can define the concept of breakeven as follows:

Breakeven level refers to the adjustment of the Stop Loss order of an open trade to a profitable area. The objective of implementing this strategy is to exclude potential losses in the current trade, effectively safeguarding our capital. By moving the Stop Loss to breakeven, we ensure that even if the trade turns against us, we exit the position without incurring any financial loss.

The Psychology Of Breakeven On Forex

The success of traders is influenced by various factors, with trading strategies and money management accounting for 10% and 20% of the equation, respectively. However, a significant portion of success, 70% to be precise, stems from psychology and emotional balance. Therefore, trading is primarily a journey of self-improvement and self-discipline. In this context, breakeven can serve as a stabilizer or a source of calmness, and each trader must decide for themselves whether it aligns with their trading approach.

Traders who neglect moving their Stop Loss to breakeven often do so out of a desire to "beat" the market in a particular situation, disregarding risk management principles. They forget that each trade is merely an opportunity to generate profit and that a trader's success hinges on the cumulative outcome of all their actions.

By moving the Stop Loss to the breakeven level, traders ensure that their trading account is not exposed to unnecessary risk. This approach allows them to step back temporarily, preserving their capital, and return to trade another day.

Breakeven becomes especially valuable when a trade accumulates substantial floating profits. It acts as a safeguard, protecting capital and preventing the unfortunate scenario of a winning trade turning into a losing one.

However, it's crucial to note that utilizing the breakeven level requires proper understanding and application. Emotional traders may be tempted to move their Stop Loss to breakeven prematurely, resulting in a high number of breakeven trades. Therefore, it is essential to thoroughly study this tool and evaluate how it can be effectively integrated into your trading strategy.

In general, if your next trade concludes without a significant profit or loss, it may be wise to take a break and rest. Achieving a result close to breakeven or closing a trade at breakeven can be viewed as a positive outcome in the long run, contributing to overall trading success.

Why Do Traders Move Stop Loss To Breakeven?

There are several reasons why traders opt for a breakeven stop in their trading:

Psychological Comfort: Moving a trade to breakeven provides a sense of comfort and security. By eliminating the possibility of a loss, traders can view the trade as a risk-free profit. It reduces the emotional stress associated with potential losses and allows traders to stay in the trade with a peace of mind.

1) Expert Opinion: Many experts in the field of technical analysis advocate for protecting earned profits, and a breakeven stop is often recommended for this purpose. By locking in profits, traders can avoid the disappointment of seeing a profitable trade turn into a loss. This helps maintain discipline in following the trading plan and preserves the expected outcome of the strategy.

2) Greed and Fear: Some traders move their trades to breakeven as soon as they have a small profit, driven by greed and fear. They fear losing the profits they have already gained and hope to capture even more gains. However, this approach can backfire if the market retraces and stops the trade out at breakeven, only to continue moving in the desired direction. Fear and greed can cloud judgment and lead to impulsive decisions. Building confidence in both the trading strategy and oneself is essential to overcome these emotions and stick to the trading plan.

3 )To build confidence in the strategy, traders should thoroughly test it on historical data for an extended period. If the strategy demonstrates consistent positive results over several months, the trader can have faith in its effectiveness. Building self-confidence requires a holistic approach, which may include activities like meditation, exercise, and self-reflection.

In conclusion, utilizing a breakeven stop can provide psychological comfort, align with expert advice on protecting profits, and help manage the emotions of greed and fear. However, it is essential to understand and apply this technique in the context of a well-tested and proven trading strategy, while also working on building self-confidence.

How Do I Correctly Set A Breakeven Level?

Moving the trade to breakeven is a decision that should be made with careful consideration. Rushing to set breakeven as soon as the price surpasses a certain number of points from the opening level can lead to premature trade closure and missed profit opportunities. It's crucial to set the breakeven level correctly and at the right time.

There are certain scenarios where moving the trade to breakeven is appropriate:

1) According to the rules of your trading system: The decision to move the trade to breakeven should be planned and integrated into your trading system. This ensures consistency in your approach and prevents impulsive decisions based on emotions.

2) When events deviate from your trading scenario: If the price doesn't unfold as expected, such as in cases of flat-lining or lack of momentum, moving the trade to breakeven can be considered. However, it's important to factor in the time element. If you entered a trade during a period of low market activity, such as between sessions, it's advisable to allow more time for the price to develop before making any adjustments.

3) Allowing for price volatility and maneuverability: It's not necessary to move the trade to breakeven immediately after it becomes profitable. Price movements can be erratic, and giving the trade some room to breathe and maneuver within a reasonable range can help avoid premature stop-outs.

The decision on when to move the Stop Loss to breakeven level is subjective and depends on various factors, such as the volatility of the currency pair, the timeframe being traded, and the trader's individual preferences. Traders often use technical tools like Fibonacci retracement, fractals, pivot levels, or other indicators to help determine appropriate breakeven levels.

Ultimately, finding the right balance between protecting profits and allowing for potential gains requires experience, practice, and continuous refinement of your trading approach.

Disadvantages Of Using Breakeven:

While applying breakeven can offer certain advantages, it's important to acknowledge the potential disadvantages as well:

1) Impact on mathematical expectation: Triggering breakevens too frequently can negatively impact the overall mathematical expectation of winning trades. Each time a breakeven is triggered, it reduces the potential profit and increases the breakeven rate, which can erode profitability over time. Traders need to carefully consider the balance between protecting profits and allowing trades to run for maximum potential gains.

2) Effect on trading statement: If a trader consistently closes positions at breakeven, it can impact the overall trading statement. This becomes significant when traders showcase their results to potential investors or when assessing their own performance. A high number of breakevens may give the impression that the trader is risk-averse or lacks confidence in their trades. It's important to strike a balance between breakevens and profitable trades to maintain a positive perception.

3) Comparison with initial stop loss: Statistically, breakevens are triggered more frequently than initial stop losses. Some traders choose to close a portion of their position at a profit level equal to the initial stop loss level. This approach allows them to secure some profit while letting the remaining portion of the trade run for potential further gains. By doing so, they aim to strike a balance between locking in profits and giving trades room to develop.

Ultimately, the decision to apply breakeven or its variations should be based on careful analysis of individual trading strategies, risk tolerance, and desired trade outcomes. Traders should consider both the advantages and disadvantages to make informed decisions that align with their overall trading goals.

Trailing Stop:

In addition to the standard breakeven closure, another option to consider is the trailing stop. This order type allows the stop loss to automatically trail the price at a certain distance as it moves in your favor. To set a trailing stop, you can right-click on the open position and specify the trailing stop size in points.

Here's how it works: Let's say you've bought the EUR/USD pair at 1.1000 and set a trailing stop of 50 points. As the price moves in your direction, reaching 1.1100 and giving you a profit of +100 pips, the trailing stop will also adjust accordingly. If the price retraces by 50 pips to 1.1050, your position will be closed with a profit of +50 pips. This type of order is particularly useful for medium-term trading or during large market movements when it's uncertain when the trend might end.

When used correctly, the trailing stop allows you to capture maximum profit from an open position. However, it's important not to set the trailing stop too tightly in volatile instruments to avoid premature closing of the position based on minor price fluctuations.

Trailing stops offer flexibility and the potential to lock in profits as the price moves in your favor. They can be a valuable tool for managing trades and protecting gains, especially in trending markets. Traders should consider their trading style, risk tolerance, and market conditions when deciding whether to use a trailing stop and how to set the appropriate distance to maximize potential profits.

Conclusion.

n summary, one of the primary goals for traders is to avoid incurring losses. The concept of breakeven is rooted in this principle, as it allows traders to protect their positions and prevent losses. By moving the stop loss to the breakeven level, traders ensure that even if the trade does not result in a profit, they will not experience a loss either.

However, it's important to recognize that breakeven can be a double-edged sword. While it protects traders from losses, it also carries the risk of giving up potential profits. This is because once the stop loss is moved to breakeven, the trade is essentially locked in at a break-even point, and any further upward movement in price will not be captured as profit.

Traders need to carefully consider the trade-off between protecting against losses and potentially sacrificing profits when deciding whether to apply breakeven. It ultimately comes down to individual trading strategies, risk tolerance, and market conditions.

It's crucial to find the right balance and use breakeven judiciously. Traders should assess the specific circumstances of each trade and make informed decisions based on their analysis and risk management plan. By doing so, traders can navigate the complexities of breakeven and strike a balance between safeguarding their profits and maximizing their trading outcomes.