Trading Educators Blog
What is a mental stop and should I be using them?
What is a mental stop? Why are traders afraid of them? Are they worthwhile? Why would anyone want to use a mental stop?
Let's begin with why anyone would want to use a mental stop! It is usually preceded by your having been stopped out of the market only to have the market reverse and go the other way, causing you to miss a possibly profitable trade.
That being said we can now address the question of "what a mental stop is."
A mental stop is a price at which you determine you should accept a loss, but with no real intention of doing so.
An actual stop-loss order is never placed in the market. What you are looking for is to see how the market reacts when it reaches your "mentally recorded" level. What you are hoping for is that prices will then reverse and move back your way.
The problem is that by the time you determine that the market is not going to reverse, the market has gone through your mental stop.
People rightfully fear using a mental stop. It takes great discipline to actually get out the moment your mental stop is hit.
Another problem arises in the form of another question: What do you gain by using a mental stop? The answer for most traders is "nothing at all."
Unless you are a trader of very large size, there is not much point in using a mental stop to hide your position. One of the most ridiculous things I have ever seen is the one-lot trader using a mental stop so that the market won't see it. This is the equivalent of an ant floating down the river on a raft, standing on his hind legs and yelling, "Raise the drawbridge."
Take my word for it the traders who can reach your stop know where people place them.