In trading, the decision to use a stop loss or not is a very personal one. Some traders use one on every trade, while others believe strongly in not using one.
What do you need to consider when deciding whether or not to use a stop loss?
Do you plan to sit with the trade?
Are you the sort of trader who sits with a trade for its whole life? i.e. Do you watch price continuously? If so, you might be happy to have a mental stop and cut the trade if price moves through a certain point, or if price is behaving in a certain way.
Alternatively, if you are happier leaving a trade alone while it plays out, ,doing other things and not following price continuously, then a stop loss will be invaluable.
Do you believe your broker hunts your stops?
Some traders believe that setting a stop loss tells their broker exactly where to move price to take them out for a loss, and that by setting a mental stop they are keeping their cards close to their chest. This makes for pretty paranoid trading. It also makes no sense.
Looking at any price chart, it’s pretty obvious where most of the stops are, and great as you are, your stops are really not moving price!
If you believe, as I do, that your broker wants you to continue trading long-term (the longer you trade, the more commission they will make) then it is a whole lot less stressful to just place a stop when opening a trade, knowing that your broker is really not interested in you blowing your account.
Are you mentally strong enough to manually close a trade for a loss?
Setting a mental stop is one option, but ask yourself truthfully: Are you mentally strong enough to follow through on your plan? Are you able to manually close a trade for a loss or do you start second-guessing, hoping price will turn around? It’s a lot easier to move a mental stop than a stop loss order.
Setting a stop loss order makes it a lot easier to exit a trade at a pre-determined price. It can still be hard but it becomes easier with time and one of the best things you can do is walk away from the screen and do something else to get some perspective.
Do you have a large store of mental capital?
As traders we often talk of financial capital, but what about mental capital? We all have a certain amount stored up within us and it gets used up throughout the day (or week, or month) through general life stresses. Add trading stresses onto this list and you can see that the more trading stress we live through, the less mental capital we have left to make sound trading decisions on our next trade.
If your trading day has been an emotional rollercoaster, you might find yourself shattered and thinking less clearly the next day. Keeping mental stresses to a minimum however, can keep you thinking clearly and making better trading decisions for longer.
Whether or not you use stop loss is completely up to you, but answering these four questions honestly can give you some idea of what type of trading would suit you best.
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