Hard Stops vs Mental Stops

Discussion in 'Risk Management' started by jiminsd, Jun 15, 2010.

  1. jiminsd


    Plus and minus of each. I am weighing the benifits of moving to mental stops. What is your take?
  2. It depends. First do you have answers to these:

    1. If mental, do you observe continuously or once each time period (such as a day, etc)?

    2. How many bars do you hold if bar is your frequency of watching the mental stop?

    3. How much are your stop costing you as a percentage of the trading vehicle. (no leverage here, even if you use leverage).

    4. Percentage of stops taken. Percentage is with respect to total number of trades.
  3. Long ago when I got my first "platform" I had put on a few trades and was getting the hang of things. Entering trades placing stops and setting targets, everything was going well..... Then one day I bought a currency, At that exact moment (I don't think I lifted my finger from the mouse) some news came out and prices dropped 150 points ($1900.00) hit bottom, then bounced up maybe 50 points. By the time I figured out "this is real" prices fell again. I think there were daily price limits on currencies back then (200 points as I recall). Seconds felt like hours and my tiny account was taking a serious beating. I kept HOPING but prices NEVER came back, I dumped the trade and was out over $1800.00 on a one lot!!!

    Since that day I always use a hard stop.

    Nowadays when I put on a trade I enter a strategy. In that strategy is a stop, entry and target. The stop is preset at my maximum $ risk level. Once the ENTRY is filled I immediately move the stop toward the entry price (a S/R bar or parabolic price). I refuse to give the market my max $ risk amount, to me a stop is the best (only) insurance I have against another trading disaster.

    Mental stops .... If I thought I could:
    Get to my desk
    Put down my latte'
    Grab my mouse
    Dump my trade
    In 1/20th of a second, I might start using them

  4. I get the best of both worlds...I use both in each trade.

    Hard Stop Price is larger than Mental Stop Price

  5. LeeD


    I am with Went Fishing on this issue. Hard stop placed with a broker/exchange is a must for trader. Even if you have perfect discipline and lightning reflexes, there are still reasons beyond your control. You may loose internet connection, get distracted by a fire alarm... You have to limit potential loss in case unexpected happens.

    However, hitting the stop doesn't have to be the only way you close a trade which isn't working out. For example, if your edge is such that most (successful) trades move in your favour pretty fast, you may want to close at break-even if the price doesn't move for a certain period of time.

    Of course, hard stop and mental stop aren't mutually exclusive. If you see the trade isn't working out, you can as well attempt to get a good exit price.
  6. I scalp and sit all day at the screen and always use mental stops. I don't really know any professional scalpers who actually use stop orders except to manage a position trade they want to not watch, or when they go out to lunch in a position trade.

    The whole thing about "a disciplined professional trader always has a stop in to protect from a disaster scenario" is hogwash... walk into any equity prop shop, look at the experienced veteran guys, and see if they're using stops.
  7. LeeD


    It all boils down to the disaster scenario planning... i.e. with the support level the firm receives whether you may have to spend 30 minutes in the phone queue to close a position if the connectivity goes down.
  8. Mental stop implies that you may not close the trade it when price gets to that point.

    If you aren't going to take the stop why set one at all?
  9. huh? I have an out and when price gets there I use a market order to hit out or intelligent order execution decision to work my way out... i don't just put in an order that will go off based only on a print at X level going off
  10. Can you explain "intelligent order execution decision to work my way out... "

    In the past I waited until the price closed below where I had calculated my stop and the used the low of that bar to execute my stop. In theory this prevented me from being shook out by spikes down when stops were hit.

    What I found, after reviewing many trades, was that over all I was better off setting a hard stop and developing a method to re-enter the trade.
    #10     Jun 16, 2010