A mental stop loss is a stop loss, which you do not set on your platform to automatically close your trade.
Benefits of Mental Stops
The Mental stop losses allow you to think before the trade is closed. More trader uses their mind in their trading the better off they will be. On other hands, the more they rely on their computer to do their work for them the worse off they will are. Computers do not have the ability to read price action and weigh risks. When you give a computer a task, it takes it out blindly and without having a question.
When you set an auto stop, your computer will close you out if the stop is reached. It not looks at price action and considers keeping the trade open because it anticipates the drawdown to be temporary. You, however, can consider several factors and decide to keep the trade open. In the long run, this can save you a lot of pips.
So using mental stops, you can:
1. Keep you from being stopped out of a good trade
2. Protect against stop hunting. Yes, some brokers do stop loss, but if your stop-loss is mental, they cannot hunt it.
3. Allows you to accurately think through whether or not it’s time to exit a trade.
Drawbacks of Mental Stops
The drawbacks of mental stop losses are evident. There will be a time when you will lose more than your max risk on the trade. Your mental stop loss could be hit, and then you may decide to stay in as you believe it is an only temporary drawdown. However, the price can keep moving against you.
This is why I advise only intermediate to advanced traders use mental stop losses. You have to be able to:
1. Handle Losses
If you cannot handle losing you simply stay in as it moves further and further against you. You have to have the emotional experience to be able to cut the bad trade lose.
2. See Price Action
If you cannot see price action yet, you should not use mental stop losses. The ability to read price action is essential to using mental stops. The mental stops are entirely based on the trader’s ability to judge whether or not the drawdown is temporary.
If you are a newbie, please steer clear of mental stops. Set auto stops until you learn to handle losses and see price action. Being able to see price action is something that grows with the experience so just be patient and keep trading.