The Stop Loss

Discussion in 'Psychology' started by murphmack, May 14, 2011.

  1. Was just thinking about it this..

    Is a mechanical stop loss for someone who cannot discipline themselves to the point of pulling the plug, accepting defeat, or identifying when they have lost in the heat of the battle? It is so much easier to just be forced out of the fight by something you already had in place. Am I completely wrong?

    In my opinion when it comes to stop losses, there are 3 tiers of traders.
    1 - The bad trader who doesn't use a stop loss but rather the "pray" method
    2 - The good trader who uses mechanical stop loss - I'm out no matter what
    3 - The great trader who can consistently use discretionary stop loss - I'll think about getting out, but see what develops

    Or does the good trader eventually evolve into the great trader, who doesn't need the hand-holding that a mechanical stop loss offers.

    Maybe it comes to down 1 mans stop is another mans double down, etc. and appetite for risk.

    Just a thought.
  2. If you have to use a stop, your edge just isn't good enough. Most likely it's just noise, random noise.
  3. Your question raises a larger issue of exits in general. When I first started trading, I didn't realize that more money was made/lost on exits than on entries. In sum, I would say that entries are easy -- exits are hard.

    I enter a trade with a "last resort" stop loss out of immediate striking range from my entry point. It's primarily to have a stop in place in case I lose my internet connection or some other disaster strikes. Beyond that, I stay in a trade as long as there's a reason to be in the trade and get out when there's a reason to get out (price/volume/support/resistance.)

  4. NoDoji


    A hard stop is used by traders who trade what price is doing in their trading time frame, not what they believe price should do.

    Averaging down is used by traders who trade what they believe should happen, not what price is actually doing.

    Both strategies can be very profitable strategies in the hands of experienced traders who can follow a trading plan consistently.

    The downside of averaging down without a stop and with using a mental stops instead of hard stops is the risk of a loss significantly larger than your trading plan allows. Price can easily run two or more times your allowable loss on a trade in a matter of seconds, especially in a volatile instrument.
  5. Fixed stop. Precise entry. Trailed using PA