The desire to minimize losses is a natural desire of any trader. One of the most popular methods of risk management is to take a trade to breakeven. But does this strategy always work in favor? Let’s get into the details.

Benefits of a breakeven stop

One of the key advantages of setting a stop loss at the breakeven level is capital protection. This approach gives the trader psychological peace of mind and reduces the pressure from possible losses.

1. Risk minimization. Exiting a deal without losses allows you to save your deposit even in conditions of high market volatility.
2. Psychological comfort. Realization that there will be no losses helps to avoid emotional decisions and stick to the strategy.
3. Disciplined trading. A trader learns to follow the rules of risk management rather than relying on intuition.

Possible disadvantages

Despite the obvious pluses, moving a trade to breakeven can also bring negative consequences, especially when used in the wrong situations.

1. Early exit from a profitable trade. Often the price after a small correction continues to move in the desired direction, but the trader is already knocked out by the stop.
2. Increased probability of closing on a random fluctuation. In highly volatile markets, the price often makes sharp movements, knocking down stop orders before moving in the planned direction.
3. Decreased overall profit level. If traders are constantly taking trades to breakeven, they may miss out on a significant portion of potential profits.

When you should and should not use breakeven

Breakeven works well in certain scenarios, but it should not be used mechanically.

When you should:

• After a strong momentum move in the direction of the trade, when the probability of a correction is minimal.
• When trading in unstable periods, when the risks of unexpected reversals are high.
• If the strategy implies a quick transition to capital protection.

When you should not:

• If the market has not yet gained sufficient strength and remains in the fluctuation zone.
• When the potential for movement is great, but has not yet reached the first significant resistance or support levels.
• In strategies with long holding positions, where an early stop will lead to lost profits.

Taking a trade to breakeven is a useful risk management tool, but it should be used consciously. Blind adherence to this principle can lead to frequent premature exits and reduce the overall profitability. It is important to consider market conditions, trading strategy and the likelihood of short-term pullbacks before setting a breakeven stop.