Using Mental Stop Losses

In the chat room this week I had an interesting conversation with a trader about mental stop losses. I have spoken very little about stop losses in the past. I have said many times to use only mental stop losses but I haven’t spoken much about why. In this article, I am going to cover the many advantages of using mental stops and why you should use them.

What Is a Mental Stop Loss?

Normally when you set a stop loss you place it on your platform where your broker can see it. A mental stop loss is a stop loss, that you do not actually set on your platform to automatically close your trade.

Imagine you enter long on GBP/JPY at the 145.00 level. The way I trade, the maximum amount of pips you want to risk is 50. You can either set a stop loss that automatically closes you out at 144.50 or you could use a mental stop loss. However, with a mental stop you have to be there to monitor the trade because instead of setting an actual stop on the platform you will set an alarm to ring where you have set you mental stop loss. When your alarm rings you go back to the computer and monitor the trade closely so you can decide whether or not closing out is a good idea.

Setting a Mental Stop

There are a few things you have to do.

1. Figure out what you plan to risk on the trade
2. If you’re not going to be monitoring closely set a price alarm about 10 pips before your max risk level.

That is pretty much it. You want the price alarm to ring a little before the level is reached. If it’s moving down fast you do not want it to fly right past your max risk level. Obviously, the amount of pips between your max risk level and your price alarm is dependent on your situation. If you’re going to be in bed you would likely need more warning. If instead you’re going to be surfing YouTube you need less of a warning.

If you are going to be watching your trade like a hawk the alarm is obviously not needed.

Are Mental Stops for you?

I think mental stops can give intermediate and advanced traders an advantage in their trading. Using mental stops allows you to better manage your trades. Inevitably, there are times the price will move against your trade. However, everything clearly indicates that it is a temporary set back and you know it will likely move back in your direction. At times like this, if you have a set stop loss you will be taken out automatically. If you’re using a mental stop loss you can stay in the trade and allow it to move back in your direction. Of course, this could also work against you as I will discuss next.

If you’re a newbie trader, mental stop losses could be a hindrance. I think you need to be at a certain level before you begin using mental stop losses. You need to be able to properly read the market. If you cannot read the price action, and anticipate what will happen next, you are better off with solid stop losses. However, there is something you can do to expedite the learning process so you can begin benefiting from mental stops too. I will discuss that a little later though.

Benefits of Mental Stops

Mental stop losses allow you to think before the trade is closed. I have always maintained that the more a trader uses their brain in their trading the better off they will be. On the other hand, the more they rely on their computer to do their work for them the worse off they’ll be. Computers (at least your standard PC or laptop) do not have the ability to read price action and weigh risks. When you give a computer a task it carries it out blindly and without question.

When you set an auto stop, your computer will close you out if the stop is reached. It will not look at price action and consider keeping the trade open because it anticipates the drawdown to be temporary. You, however, can take several factors into consideration and decide to keep the trade open. In the long run, this can save you a lot of pips.
So using mental stops can:

1. Save you from being stopped out of a good trade
2. Protect against stop hunting. Yes some brokers do stop hunt but if your stoploss is mental they cannot hunt it.
3. Allows you to properly think through whether or not it’s time to exit a trade.

At times I will have a trade break a S+R line, and then move against me. For example, a new report can be released that pushes the price against me temporarily. On some of these trades, I can tell by looking at price action that it will likely head back in my direction. If my stop loss is mental I have time to analyse the market and decide whether or not keeping the position open is viable.

Drawbacks of Mental Stops

The drawbacks of mental stop losses are obvious. There will be times when you will lose more than your max risk on the trade. Your mental stop loss could be hit and you may decide to stay in as you believe it is only temporary drawdown. However, the price can keep moving against you. I consider myself an advanced trader and this still happens to me. It cannot be avoided but overall mental stops save me more pips than they cost me.

This is why I suggest only intermediate to advanced traders use mental stop losses. You have to be able to:

1. Handle losses: If you cannot handle losing you may just stay in as it moves further and further against you. You have to have the psychological experience to be able to cut a bad trade lose.

2. Read price action: If you cannot read price action yet you should not use mental stop losses. The ability to read price action is essential to using mental stops. The concept of mental stops is based entirely on the trader’s ability to judge whether or not the drawdown is temporary.

If you’re a newbie please steer clear of mental stops. Set auto stops until you learn to handle losses and read price action. Being able to read price action is something that grows with experience so just be patient and keep trading.

Play It Safe

One way to protect against losing too much, when using mental stops, is to have an emergency auto stop 10-20 pips beyond your mental stop. This protects against losing a lot of pips on very fast moves that push right through your metal stop area.

Should You Switch To Mental Stops

This is something you will have to figure out for yourself. Give it a try for a few weeks and see how it works. I found that for some traders switching to mental stops doubles their overall profit. Other traders tend to see the same results as they have with auto stops or have worse results.

While using mental stops certainly doesn’t sound conventional it can give you an edge.

Remember though, if you are not close to your computer and cannot monitor your trade be sure you set an auto stop.

If you like this post leave a comment please.

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26 thoughts on “Using Mental Stop Losses
  1. Good info. I am going to stay with a hard stop personally, but I am curious how it is possible that a trade could move 50 pips from the line and still end up winning. Keep in mind that my base of experience is about 3 months, so I have not seen much.

    Thanks for posting.

  2. Great piece Nick. On the stop hunting part of you article, I know that I’ve experienced stop hunting. What broker do you use?

  3. Feb 7th,2009 9:30pm

    Hey Nick,

    I didn’t know the Broker’s were Stop Hunter’s
    I definetly intend to change that–I like
    the mental stop but as you said –not always
    at the P/C.


    Keep up the good work.

  4. This is an interesting perspective, Nick, particularly since it flies in the face of most of the other trading advice that I’ve read. Nonetheless, I do understand your point of view and appreciate you stressing that this technique is best for more experienced traders. As a new trader, I wouldn’t feel comfortable or safe using mental stops, but as my experience grows, I may want to re-evaluate my methodology. For now, I would be very interested in any insights you may have as to how to minimize the effects of the broker stop hunting that you mentioned. Thanks for the continuing education.

  5. Nick,continue doing your good job.I have 2 questions for you.
    1.What is the difference between volume and volatility?
    2.What are some of techniques that you use to read the market?

  6. Great info as always Nick B! Since I’m new to the 4x game, I’m going to play it safe for a minute and continue setting up my predetermined stop losses. I will incorporate the 10-20 pips below the mental stop loss system you use until I develope the skills needed to become a mental stop loss expert. Your the best Nick! Thanks for everything.

  7. If you had said it exactly like this a year ago, I am sure I would not have “got it”. In fact, in the last 1-2 months, we (I and a trading partner) have learned that some can go against what we thought by a stretch more than our mental stop; and if the overall trend is with the trade, we very often can hold it and survive it back into a tidy profit.

    Because we’ve seen it (and felt it!) some now, what you said makes perfect sense.

    Because of that, I would — and did — always use hard stop losses in all my trading until we gained the experience to “feel” what you said, not just hear it.

    I guess I am an intermediate trader by this point, but I do not consider myself as such. Seeing this blog post and having just learned it from experience over the last month or two is helping me to feel more intermediate now than beginner.

    Great post, and thank you!


  8. Great post, Nick!

    I was thinking of switching to mental stops myself lately, as I suspect my broker of stop hunting. BUT I think it is also very important to also put a normal stop 10-20-30 pips away from the mental stop. Some unexpected news could make price spike hundreds of pips against you in a matter of seconds.

    Thanks for a great article!


  9. Thanks Nick, good read & as a newbie I’ll be playing it safe, I might come back to this a few months down the line.


  10. Well, it is true that some brokers hunt stop losses. Last month I had 1500 pips against me on GBpjPy on buying while it sold, left it and now it has retraced and still making profits with it. it worked if there is a good money management. (I mean good leverage) then you can go on trading leaving the trade to come to your favour.


  11. Hello Nick, I want to say I am so excited to be a part of this forum. I am still a newbie but I have the inclination to think that you are my model trader. I do not enjoy stop loss myself. I rarely use them as I think I should be able to use my brain. I tried the S/L sometimes and was not so happy to have been stopped out of trade when obviously the trades would have bounced back. I therefore agree with you 100 percent!!
    Thanks for your contributions and the free education you provide.

  12. It has also long been obvious to me that most Brokers are certainly stop hunters. FXCM seems to be the worst of all!

  13. Nick,
    Thanks for expantiating on our discussion. I now use mental stoploss confidently with synapse 30 minute scalp (1hr for GBP/JPY. I do this since i have to be around my computer anyways for the duration of the trade. It has helped me tremendously. It has even saved me up to 20pips on my losing trades. coz i can watch price action and see momentum clearly shifting against me so i bail.But it has also helped me stay in trades that my stop loss would have triggered. Sometimes the price comes and just sits on my stop loss and the just goes back in the other direction for a winning trade.

    Hope this helps others.

  14. finally I bought your video without any obstacles… I tried to buy it since the end of last year but facing so many problems… I hope can make use of it for full time successful trader in future… thank you

  15. the problem with a mental stop, is if your internet fails or you PC shuts down.

    no stop in place is very dangerous, and yes broker do stop hunting, which is an other issue!