Mental Stops

Back on with Benzinga, I mentioned mental stops quite a bit in my segment. But mental stops are a topic that deserves a little more explanation than I gave on the show. We all know what stop orders are. If you don’t then stop reading now and read this. We call them hard stops. I’ve always used them in my trading. Always. Then some years ago, Raghee Horner said something about stops that really resonated with me.

“If your stops are not set, your broker will never know about them.”

While that statement did resonate with me, I didn’t really understand why she said it until recently. I believe the reason now is high frequency trading (HFT). Undoubtedly, there is HFT in the forex markets now too. If the broker-dealers can see your orders, you better believe the algos, black boxes, dark pools and other sinister machines see them too.  Sound trading plans, which dutifully included hard stops, have been chopped to death in these markets. And I’m not the only one who thinks so. Pro veteran trader Peter Brandt wrote about this some years ago and the change he made to mental stops in order to remain competitive. However, despite these pros’ thoughts, I still used hard stops in my trading. Using bracket orders (limit orders in which both or either the stop loss and target limit are set too),  stops were placed as soon as I entered a position and adjusted to break even once the trade was in the money.

stop sign

No matter the basis, use stops in your trading

This sounds like a sound and prudent strategy. However, it was not yielding the results that they once were. So, very recently, I made the move to mental stops as well. It wasn’t until the Benziga show appearance that I reflected on how this trading strategy is working for me and what it might mean for newer traders.

Using mental stops mandates a disciplined approach in your trading. That is why novice traders cannot use them. As a novice, one is training to be disciplined in developing a trading plan and system. Once that hurdle is crossed, the newbie is then training to properly execute that plan and manage the emotions and ego that comes with trading in the markets. The practice of determining risk and sticking to exits is learned very practically using stop and limit orders.

Until your trading psychology is tight, I do not think you can successfully employ mental stops. Again, if you are a novice trader or a trader struggling with your mental capital, use the hard stops. Using mental stops does not mean we are no longer using stops in our trading. On the contrary. If you use a mental stop, you already know the level at which your trading plan is wrong. It’s just not being telegraphed to the market. Rather, we want the market to move as it should without the temptation to run orders that the HFT ilk is fond of doing. Mark the stop loss level on your charts and develop a rule for when you will manually come out of the trade. Will you get out on a break of the level? On the close? After a couple hours? A couple days? You will need to make that determination way before you think about using a mental stop in your trade. Mental stops can only be utilized within a well-defined trading plan. Fail to plan and you ultimately have plans to blow up your account. Be smart.

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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