Risk Free Trading in Forex refers to a technique where a trader, after achieving a certain level of profit in a trade, moves the Stop Loss (SL) to the entry point to ensure that no loss is incurred if the market reverses. This method helps traders protect earned profits while maintaining the potential for further gains.
The Relationship Between Risk Free Trading and Stop Loss
A Stop Loss is a tool used to limit losses, set by traders based on their analysis to exit the market if the price moves in the opposite direction of their prediction. Risk free trading involves moving the Stop Loss to the entry point (or beyond) after securing some profit, ensuring that even if the market reverses, the trade closes without a loss or with locked in profits.
Pros and Cons of Risk Free Trading in Financial Markets
Executing risk free trading in financial markets has both advantages and disadvantages, as outlined below:
Advantages
1) Capital Protection: Moving the Stop Loss to the entry point prevents potential losses.
2) Reduced Psychological Stress: Traders can manage trades with greater confidence.
3) Opportunity for Long Term Holding: Without the fear of loss, there is a greater chance to maximize profits in extended trends.
4) Improved Risk and Capital Management: Helps traders adhere to precise strategies and follow sound investment principles.
Disadvantages
1) Premature Exit from Trades: Short term market fluctuations may trigger the risk free Stop Loss, closing trades with minimal profit even when the trend is still ongoing.
2) Reduced Profit Potential: If a trade is closed too early, opportunities for larger gains may be lost.
3) False Sense of Security: Some traders neglect further market analysis after making a trade risk free, missing out on optimal trading opportunities.
4) Lack of Flexibility in Certain Markets: In highly volatile markets, excessive risk free adjustments may lead to unnecessary trade exits.
Risk Free Trading in Crypto and Futures
In the cryptocurrency market, due to high volatility, implementing risk free trading is crucial. This approach is commonly used in both Spot and Futures trading. Below are the methods for executing a risk free strategy:
1. Moving the Stop Loss to the Entry Point
After securing an initial profit, move the Stop Loss to the entry point so that if the market reverses, the trade closes without a loss.
2. Partial Profit Taking
In Spot or Futures trading, a portion of the profit can be taken while the remaining position is managed with an optimized Stop Loss to secure additional gains.
3. Using a Trailing Stop
This tool allows the Stop Loss to adjust with price movement and ensures that the trade is closed at an optimal level in case of a market correction.
4. Reviewing Trade Volume and Leverage
If using high leverage, risk free trading becomes even more essential, as sharp price fluctuations can quickly liquidate an account. Therefore, combining a structured capital management strategy with risk free techniques is necessary to mitigate risks effectively.
Difference Between Risk Free Trading in Forex and Cryptocurrency
| Comparison Criteria | Cryptocurrency | Forex |
| Market Volatility | Highly volatile; price changes of 10% or more can occur within minutes, triggering the risk free Stop Loss prematurely. | Lower volatility; traditional assets like fiat currency pairs are more resistant to extreme price fluctuations. |
| Trading Hours | Operates 24/7 (non stop trading), making risk management more challenging. | Open on business days and closed on weekends. |
| Risk Free Execution Methods | Some crypto exchanges lack advanced Stop Loss management tools, requiring manual execution. | Brokers offer precise automated risk management, including Trailing Stop Loss settings. |
| Liquidity & Stop Loss Impact | Lower liquidity in some cryptocurrencies can cause Stop Loss activation at an unfavorable price. | High liquidity reduces price slippage when executing risk free strategies. |
| Leverage & Overall Risk | Some exchanges provide extremely high leverage (e.g., 100x), increasing risk and causing rapid Stop Loss activation. | Generally offers lower and more controlled leverage compared to the crypto market. |
Methods for Implementing Risk Free Trading in Forex
In this section, we explore various methods for executing risk free trading in the Forex market:
1. Setting Stop Loss (SL) and Break Even
In this method, the Stop Loss is initially placed below the entry point. When the price moves a certain distance in profit, the Stop Loss is moved to the entry point. This ensures that even if the price reverses, the trade closes without a loss.
2. Partial Profit Taking
In this method, a portion of the profit is cashed out at specific levels, while the remaining trade is managed with an adjusted stop loss. This approach is a combination of profit taking and risk reduction, allowing traders to maximize their gains in long term trends.
3. Risk Free Trading Using the DCA (Dollar Cost Averaging) Method
The DCA (Dollar Cost Averaging) method for risk free trading in Forex involves entering a trade in multiple phases with specific volumes.
The trader buys or sells at different price points and, if the price moves in favor of the trade, the overall Stop Loss is adjusted to a level above the average entry price.
How to Risk Free Trading in Binary Options
Unlike Forex, the traditional concept of risk free trading does not exist in Binary Options, as trades have a fixed expiration time and there is no option to adjust the Stop Loss.
However, an alternative way to reduce risk is through hedging, which involves opening a trade in the opposite direction with an appropriate amount to offset potential losses.
Another substitute for risk free trading is managing the percentage of invested capital, meaning that the capital allocated per trade is adjusted in a way that, even in case of a loss, it does not significantly impact the overall account balance.
Difference Between Break Even and Risk Free Trading
Break Even means that a trade closes without profit or loss. This term is more commonly used in financial analysis and investment, representing a point where revenues equal costs.
Risk Free Trading means that after securing an initial profit, the Stop Loss is moved to the entry point (or higher) so that if the market reverses, no loss occurs. This technique is used in risk management strategies.
Break Even is a financial state, whereas Risk Free Trading is a trading technique aimed at preserving profits and reducing risk.
Difference Between Risk Free Trading and Save profit in Forex
Risk Free Trading means that after gaining some profit in a trade, the Stop Loss is moved to the entry point, ensuring that if the price reverses, no loss occurs. In this case, the trade remains open, and further profits can still be made.
Save profit involves closing a portion of the trade at key market levels, securing a certain amount of profit while managing the remaining position with an appropriate Stop Loss. This method reduces risk while ensuring part of the profit is locked in before the price reaches its final target.
Risk Free Trading prevents losses but does not lock in profits, whereas save profit secures a portion of the profit, guaranteeing trade profitability.
Partial Profit Taking in Forex and How to Implement It
Partial profit taking is a popular method in Forex that helps traders maximize gains from market fluctuations. This approach involves closing a trade in multiple stages at different price levels to lock in partial profits and reduce risk.
How to Implement Partial Profit Taking:
Dividing Trade Volume: Instead of entering a trade with a fixed volume, split the trade into multiple portions.
Setting Profit Taking Levels: Identify key technical levels such as resistance zones or Fibonacci retracement levels, and take partial profits at each level.
Managing Stop Loss for the Remaining Position: After securing the first portion of profit, move the Stop Loss to the entry point to make the trade risk free.
Holding the Final Trade Portion: If the market continues its trend, keep the remaining position open until it reaches the final profit target.
Best Situations for Implementing Risk Free Trading
- After Achieving a Certain Initial Profit
The best time to make a trade risk free is after the price moves favorably and reaches at least 50% of the initial target. If done too early, natural market fluctuations may trigger the Stop Loss, leading to an early exit from a potentially profitable trade.
If you buy EUR/USD at 1.1000 with a target of 1.1100, once the price reaches 1.1050, you can move the Stop Loss to the entry point (1.1000) to ensure a risk free trade.
- During Breakout and Price Stabilization
If a trade is initiated based on the breakout of a key level (such as support or resistance), it is advisable to make the trade risk free only after price stabilizes above the breakout level. Otherwise, the breakout may be false, and the price could return to the previous range.
If the price breaks above the 1.2000 resistance level and moves to 1.2025, you can move the Stop Loss to 1.2000 to prevent losses in case of a pullback.
- In Strong Trends and Trend Following
When a strong trend develops and you have entered a trade in the direction of the trend, the best time to make it risk free is after confirming the trend and price stabilization.
In an uptrend, when the price forms a Higher High, move the Stop Loss to the previous Higher Low.
In a downtrend, after forming a Lower Low, adjust the Stop Loss to the previous Lower High.
- During Partial Profit Taking
When applying the Partial Profit Taking strategy, after closing a portion of the trade in profit, it is best to move the Stop Loss to the entry point to ensure that the remaining position is risk free while allowing for potential further gains.
If you buy at 1.1000 and take partial profit at 1.1050, you can move the Stop Loss to 1.1000 to protect the remaining trade.
- When Trading with High Leverage
In Futures and Forex trading with high leverage, even small market reversals can lead to significant losses. Therefore, risk free trading is essential when using leverage, especially in high volatility markets like cryptocurrencies.
In a Bitcoin Futures trade with 10x leverage, if the price reaches a certain profit threshold, moving the Stop Loss to the entry point can help prevent liquidation risk.