Debate: Hard stops or mental stops?

[Soultrader 12]

Whether a trader use hard stops or mental stops is the traders preference. I personally use a hard stop. As soon as I enter, I place a 10 point stop on all my trades. As the trade works in my favor, I will adjust my stops accordingly.

 

One topic I want to discuss is the difference in using hard mechanic stops to mental stops. For a new trader starting out in trading, I always recommend a mechanical stop. But like all new traders do, they will tend to move their stops when they are in a losing position.

 

 

 

Bob Pretchter argues that stops should be used by real-time analysis and not by price. I agree to an extent that a stop or exit signal should be based on what your initial reason for entry was. If your entry signal was based on a indicator, your exit should be based on that indicator as well.

 

It is common knowledge that floor traders like to push prices to trigger stops.

This is because new traders tend to place their stops in the same exact location. How many times have you seen a market break the low by a few ticks, take alot of new traders stops out, then reverse? Plenty.

 

I personally use mechanical stops. This is because my trades are done strictly around price levels without the use of indicators. I know that if price drops 10 points past the pivot, I am wrong. This is automatic.

 

I would love to hear more on this topic for anyone who may find that article interesting. Thanks

Edited April 20, 2011 by Mysticforex

[luke24.5 10]

I place stops on the fly according to what I'm reading in the volume. If market moves agaisnt me, I may scale in to improve my entry price or I may get out and wait for the market to confirm it's direction.

[Soultrader 12]

You mean you average down on a losing positon? How many times has that helped you?

 

One of the rules I follow is to never average down but I am aware that for some people it does work. Most of your stop placement is done at or near high volume areas?

 

This is interesting because this would mean your core trading philosophy is volume based.

[extradosage 10]

I use stops based on fibonacci levels. As prices then move in my favor I will adjust them by fib levels. Eventually I do want to start using mental stops. This way I may be able to exit faster when I know I am wrong.

 

I have a tendency to know that the trade is not going to work and will let the markets stop me out. This can become a costly habit.

[Reaver 10]

I use both. I have a bottom line puke point hard stop that I put way off in the distance, for backup, but as far as my working stop, I keep that mental. I like to make sure I know what the markets are doing before I let something like a hard stop arbitrarily take me out of the trade.

[ahimsa 10]

good evening,i use ever the stop loss near the level, but when i use the mental stop many time i'm afrai to fall in a ypnotic effect that don't give me more the right security for safe and close the position.

[sundaram iyer 10]

I will tell u the stop tech,,emprical ,,why and what for the stops.,if ur sitting in front of the trading screen why stop is,fix a profit and loss target,come out and close the trade.i dont belive in stop loss theory.i am trading for 15 years.i am profitable trader.i dont use stops, i define my profit and loss.

[ahimsa 10]

hi sundaram,exscuse me,... but,....surelly you are a lot of experience,you trade like an istitutional without a stop .ok, me too some time don't use the stop ,i'm aware by the risk..but if in" real" suddenly open with a big gap? you can safe the little lose?

[Ericthetrader 10]

Most of the time I use hard stops... to prevent me from taking too much risks..

[stockmarketmindgames 10]

I normally place stops near the high or low of the resistance/support. It depends. For instance the high is 2300 which caused a reaction to happen, my stop would be 2303, give it another 3-5 points buffer. Same goes for the low.

[estrader 10]

An inexperienced trader (less than 5 years) should only use hard stops without question and never, ever move them in a direction that increases risk. It will take years (5+) before you are proficient enough to use mental stops.

[WHY? 16]

I use both. I have a bottom line puke point hard stop that I put way off in the distance, for backup, but as far as my working stop, I keep that mental. I like to make sure I know what the markets are doing before I let something like a hard stop arbitrarily take me out of the trade.

LOL I really like that description Reaver!!! "Bottom line puke point hard stop".

[mg1193 10]

For intraday trades always hard stops. For swing trades mental stop may work.

[WHY? 16]

Stop losses will get gunned. Are you prepared for that?

[mg1193 10]

Stop losses are always welcome in a trader's daily life. Without it a trader can not stay in this game.

[flynhigher 10]

Soul Trader,

 

Excellent question!

 

Do you mean 10% when you stated that you set your stop at 10 points? I have never used a percentage to figure a stop. I usually look at support/resistance.

 

Also, I couldnt agree more about not averaging down, though I have made this mistake many times in the past and I am sure to do it again, it is a rule of mine.

 

I set a "puke" point hard stops and use a mental stop as well as Reaver.

 

I wonder if Investopedia has that Puke point hard stop in their glossary!

[daytraderx 10]

If you’re looking for an online stock broker then you’re probably overwhelmed with choice. With dozens of large name banks and economic institutions right now offering a brokerage service, how do you now what to choose? The great news is that with so numerous good organizations competing for your corporation, the service is tip first and really little separates the top 3 online brokers right now. Online stock brokers essential fulfill the same service that traditional brokers in an office used to do ten years ago. Back then, in case you wanted to purchase or sell stocks you had to pick up the phone and call your broker. He (or she) would then fulfill the order upon which a certificate would be issued to you as proof that you own that stock.

 

Although stock brokers still exist, the process has been streamlined to the extent that you could sit in your living room and purchase or sell shares at the push of a button. With an online share broker, automated.......

[MadMarketScientist 11]

I agree ... stop losses submitted will get picked off by the big boys. I would just keep them in a spreadsheet and update your positions every day after market close. I personally use tradestops.com, not free but well worth it

 

Stop losses will get gunned. Are you prepared for that?

[Stock Trader One 10]

Most of the time I place stops and limits on my trades

[speres 10]

Always a mental stop, I let price action dictate whether I'll be closing or not,your stop needs to be away from those areas with clusters of orders, they will be hit and obvioulsy you need a hard stop in the background

[phantom 16]

Ever had a position on and your electricity go off before you entered a hard stop?

 

This happened to me in a fast market once. It will never happen again.

 

Hard stops for day traders is the only way to go...

 

 

Luv,

Phantom

[JTurner77 10]

I agree ... stop losses submitted will get picked off by the big boys. I would just keep them in a spreadsheet and update your positions every day after market close. I personally use tradestops.com, not free but well worth it

 

Are you guys saying that stop orders are identified as such and visual to other traders or are you simply saying that the pros will look to goose the price thru a certain area they believe have a high probability of containing stop orders?

[SIUYA 11]

Are you guys saying that stop orders are identified as such and visual to other traders or are you simply saying that the pros will look to goose the price thru a certain area they believe have a high probability of containing stop orders?

 

both.....

often well known stop order levels can be triggered as people try and push prices.....thats just the market working normally.

These days with automated systems and brokers having access to everything a lot will depend on the broker, and how paranoid you are.

There are certain CFDs and spread betting places that "supposedly" measure your early trading style and look to not hedge you ...estimating that you will be part of the 90% that loose money.

Additionally think about it this way....if you are sitting at a firm and have acces to everyones orders, is there a temptation to try and profit from those orders.

(If you are really worried..... when holding things longer term is swap brokers...close the trade in one and re-open in another.....the cash difference is minimal (a few brokerage dollars,) but it means no one really knows what you are doing over the long term.) It may seem to loose at one broker, but not at the other.) Potentially a pain to keep track of but pretty easy really when using excel to combine two balances.

[MightyMouse 12]

Most people struggle with the idea of being wrong. A mental stop? I am not sure why anyone uses a mental stop. Is that for a real trader? That is really crazy. It is as if one thinks he is smarter than the market. He opens the door to trading with unbounded risk. A stop isn't where you are right or wrong; instead, it is where you no longer want to take risk at a particular moment in time. Not using a stop means you are willing to accept continuous risk and that is simply insane.

 

If one struggles with being wrong, then he should really consider some other vocation.

[empirico 10]

good evening,i use ever the stop loss near the level, but when i use the mental stop many time i'm afrai to fall in a ypnotic effect that don't give me more the right security for safe and close the position.

 

Whatta heck is your" hypnotic " (watch out mistypes) effect? Do you take substances or booze while in position?-))