A mental stop loss is a place where you’re “supposed” to exit your trade, but seldom do. For me, a mental stop loss is nothing more than an excuse to hang on to a losing trade, which makes it very detrimental to any trader.
Unfortunately, as humans we’re not very good at accepting loss. Beginner traders are usually very hesitant to use physical stop loss levels, even though they are almost the single most important component of building a successful forex trading system.
Imagine for a moment that you have the choice of deciding whether you should cancel your position manually or have a hard stop set that will take you out of a losing trade automatically. Which would you choose?
Now, I shouldn’t need to define a hard stop, but let’s cover it quickly anyway. A hard stop is a predetermined exit level that you set on your trading platform to take you out of a losing trade. What a hard stop does is remove the need for you to constantly monitor price, saving your proverbial “psychological bacon”.
See, for me, a mental stop loss is for the trader who is afraid of taking a loss, or for those with unlimited capital to burn. The latter of which I’m assuming none of us are. As traders, our capital is really our only asset (besides mental traits), so it needs to be given protection as a priority.
As traders, trading is our business, and in order to mitigate our risk we need to have certain measures in place. Without a hard-stop, the second we lose concentration the potential for things to get out of hand is drastically increased.
“But I’m a scalper, surely I don’t need a hard stop?”
Au contraire, the shorter the timeframe, the riskier the trade, my friends. When chasing smaller targets, scalpers tend to use a larger position size, and a larger position size can lead to a larger loss, faster.
Do yourselves a favor and make setting a hard stop your priority, I guarantee it will not only help preserve your capital, but preserve your psychological wellbeing.
Source: Vantage FX Blog