Trading Psychology: Setting Stops The Stress-Free Way

From newbie to professional, most traders are quick to tell you that setting stops can be a real pain in the ass.

Well, yeah…it certainly can be a pain.

But it doesn’t need to be.

Continue reading this brief trading psychology article to learn how to let go and set stops the stress-free way! 

The Illusive Holy Grail

Many stock traders I have met over the years seem to be on a perpetual quest to find the ultimate stop technique.

Traders in search of an absolutely perfect method of setting stops believe that IF they can find that one special system, the Holy Grail of stop setting strategies, all of their problems with setting stops will magically disappear and trading profits will burst through the door.

They envision a reward like Indiana Jones did upon capturing his Holy Grail back in 1989:

To find the Holy Grail of setting stops, adventurous traders usually start by Googling something like “best technique for setting stops” for hours.

Upon doing so, they discover that many traders simply set the stop price at a fixed percentage below the entry price.

They also learn there are just as many traders who swear by volatility or ATR-based stops.

Further research into the best methods for setting stops even reveals that many successful traders simply set a stop below technical support of a “swing low” price within a reliable chart pattern.

Owww, my head hurts! Who to believe?

Let me save you a ton of research time by declaring there is NO HOLY GRAIL when it comes to setting stops.

No single method will work all the time.

No matter how carefully planned or painstakingly backtested your strategy, your stop eventually WILL get hit.

But, that is actually the good news.

Once you understand that no single method for setting stops is perfect, you can free yourself of all the pain associated with analysis paralysis.

You know, that’s when you waste time and energy over-analyzing why a stop was triggered.

Relax, It’s Okay To Stop Out

When I first began trading and my stop was hit, I would stare at the chart and think of a few different scenarios that might have allowed me to avoid getting stopped out.

Such analysis paralysis of a single trade could easily devour 15 to 30 minutes or more of my precious time…every time.

Again, I was constantly searching for some perfect method that simply did not exist; yet I was mentally beating myself up trying to find one.

Such a destructive pattern of thoughts can eventually eat away at your trading psyche…but only if you let it.

I eventually broke out of that vicious thought cycle when I eventually came to the simple realization that there is no “right” or “wrong” way to set a stop.

It really just depends on which methods you feel most comfortable with, as well as what best fits your individual trading style and risk tolerance.

The ONLY Requirement For Setting Stops

Although there is no “correct” way of setting stops, there is one important requirement to having a successful system for setting stops — BE CONSISTENT.

Don’t jump from one stop setting method to another.

Instead, find a stop setting strategy that works for you, stick with it, then work to hone and improve it.

When you set your stop, believe in it and utilize a “set it and forget it” mentality; the trade will either work or it will not (it’s simple if you let it be).

It will also benefit you to see how better technical stop placement can help reduce trading losses.

Finally, having a strategy to find low-risk buy entries in a bull market can also be extremely helpful in avoiding unnecessary stop outs.

Chasing entry prices of leading stocks often puts you in a position of weakness, which in turn leads to bad decision making.

Buying stocks at low-risk entry prices, combined with consistency in your stop placement methods, will obviously make you more trading profits.

But more importantly, you will be rewarded with mental calmness that improves your life in the ways that money sometimes cannot.

Above all, you can start investing your brain power on how you will re-enter a trade when you’re stopped out, rather than dwelling on the reasons your stop was hit.

What are your thoughts on the psychology of setting stops? We would love to hear from you! Please leave your comment below.