By Taylor Wilman

Every trader should accept the possibility that their trade will go against them when they enter it. But while the possibility of loss is always there, the experienced trader can take measures to reduce the potential amount they can lose. The most commonly used technique for cutting losses is stop-losses. These are orders that traders set with their Forex brokers in which they are automatically stopped out of a trade when a certain condition is reached. Setting the exact level of these stop losses is tricky since you want to maximize your profits without absorbing too high an amount of loss in case you experience a losing trade.

However, there are some traders who choose not to use stop-loss orders since they are set not as a response to current market conditions but based on a risk management rule that is determined beforehand. Thus, the trader has no flexibility to keep the position open if he senses that the price movement may turn in his favor. Thus, they choose to use ‘mental stops’ instead. This means that in the course of a trade, the trader mentally chooses the level at which he will exit the trade should it start to go against him.

If a trader uses this method of risk management, then he has to learn to exercise extreme self-discipline in order to stick with this trading system without making trading decisions based on emotion. In addition, you have to stay in front of your computer while the position is still open to monitor it and you cannot step away. But if the trader has chosen his stop levels correctly and he is able to put emotion aside and the amount of risk he is shouldering is not excessive, then mental stops can be an effective risk reduction tool.

Article by Taylor Wilman