I will start this article with an example. You predict that the gold price (XAU/USD) will increase shortly and enter a BUY order. However, the price goes against your prediction and falls. But the more it falls, the more you BUY and even enter with larger trading volumes. As soon as the price rebounds, your account will break even and become profitable.
In Forex trading, I call the above action Loss-holding and stuffing. In contrast to the Profit-holding strategy, Loss-holding is like a suicide mission.
Why do we talk about this dangerous method? Because I have seen a few people make profits from this style of capital management and want to share some points of view about it.
What is Loss-holding?
This is a capital management style that does not set Stop Loss (SL). When the price goes against your prediction, you will continue to enter orders to average the price. When the price goes right, you will break even or become profitable.
Scenario 1: Loss-holding + stuffing BUY orders
I enter a BUY order and the price decreases but I decide not to use the stop loss. The more the price drops, the more I continue to open BUY positions. When the price bounces back, I get the breakeven point and close all BUY orders.
Scenario 2: Loss-holding + stuffing SELL orders
On the contrary, the more the price decreases, the more SELL orders I enter. Then I wait for the price to rise again and close all orders.
How to trade with this capital management
The biggest problem of Loss-holding strategy is timing. When will you enter new orders and what is the suitable trading volume? This is a specific case.
For instance, I trade XAU/USD and stuff based on the Fibonacci indicator.
The gold price is on a downtrend in the daily chart. What I need to do is wait for the price to pull back to enter a SELL order. Of course, with the way of capital management, I will not put Stop Loss on this SELL order.
As soon as I enter the SELL order, the price keeps going up. Now it’s time for me to use Fibonacci retracement to determine the next SELL entry price zones. Then I start the process of loss-holding and stuffing.
I continue to open 2 SELL orders at the Fibo 38.2 and Fibo 50. Finally, when the price falls back and my orders are breakeven, I close all 3 SELL orders.
EA capital management (auto trading bot)
Loss-holding and stuffing strategies are one of EA’s trading methods (in short of Expert Advisor, also known as Trading bots). I have met many successful cases of using EAs to make money in this market.
There are many methods of using EAs with Take Profit but without Stop Loss. You can see a simple example below.
EA stuffed orders with only 1 currency pair EUR/USD.
BUY and SELL EUR/USD. After looking at the picture you will understand. All orders have only Take Profit point but no Stop Loss.
The lower the price, the EA will use the loss-holding strategy and stuff more BUY orders with the larger trading volume. As long as the price retraces to touch TP, all orders will be closed.
Of course, this method can only be used for a certain number of currency pairs. Besides, the trading capital must also be large to cover losses. But in general, until now, this is still considered a way to make money in the Forex market.
Evaluate the Loss-holding strategy
Ignore the above because it’s basically just writing, speaking, and talking on paper. When you use this way of capital management to actually trade in the market, your account will burn sooner or later.
You need to read to avoid using it later.
I usually divide the account status when trading Forex into 5 categories:
(1) Big loss
(2) Small loss
(3) Break even
(4) Small win
(5) Big win
With this capital management method, your account can only fall into 4 states from (1) to (4).
Every trader when using the loss-holding strategy just wants to break even as quickly as possible. So, if you are lucky, you will only break even or win a small amount. On the contrary, if you are unlucky, you have no money left in your account.
Why do you use this method in the first place? Is it because of your trading strategy or because you are afraid of losing money?
Inexperienced traders often think like this. “If I don’t close the order, it means I still don’t lose any money. The market always goes up and down. Sooner or later, I will break even and gain some profits.”
So, they embrace two things in their minds. Fear of losing money and hope. At this point, their money will be decided by the market and they no longer hold the initiative in their hands. Of course, Mr.Market never ignores delicious preys like them.
“Go against the trend + Loss-holding + Stuffing = Suicide”.
If you have experienced it, you will understand immediately when I write the above formula. It’s okay a couple of times when you’re lucky enough to win. But if you repeat the above formula over and over again, you’ll lose every penny in your pocket for sure. Here is a specific case.
In early November 2020, the US Presidential election event occurred. This is an account that placed SELL positions, used Loss-holding and stuffing strategy. The account holder even topped up more money to hold those orders. Result: Lost nearly $30,000 in just 2 days.
My advice is that you shouldn’t use the Loss-holding method to manage your money in Forex. This strategy will give you negative emotions in trading. They are the fear of losing money and the hope that the price will return to help you meet the breakeven point. You won’t be able to do anything but observe the price constantly on MT4 or other trading platforms.
If you use this method for EA trading, I have no opinion. But if you use it yourself, I believe that sooner or later your account will go on fire. So my last line is don’t try to use it and regret later.