What is the difference? There is a big difference!
My mentor always states the following: “Your stop loss is not placed for fear of loss but as a level of negation of your trade idea. Therefore, it is called a Stop instead of Stop loss”. The psychology behind the words is key here.
The word “loss” is a negative meaning that people fear and try to avoid. When it does occur, the personal’s state of mind is altered to a point where logical thinking no longer occurs and “panic” sets in. Many people believe they don’t panic when they loss but there are many forms of panic.
Here is a great analogy of prove the point:
In Elementary school, there are two boys. The first boy’s name is Ben. The second boy’s name is Frank. One day at school, Frank was walking to school as he NORMALLY does each day. As walking, Ben approaches Frank. Ben hits Frank in the stomach for no apparent reason and then walks away. Frank doesn’t understand why Ben did that so he doesn’t take any action. The second day Frank walks to school and runs into Ben again. Again, Ben hit’s Frank in the stomach again and walks away. The third day comes and Frank again takes the same path. Again, he runs into Ben but this time Frank is prepared. He had a bat that he used against Ben. Ben completely surprised could not react in time and was struck with the bat. The bat caused Ben to lose two teeth.
So what is the moral? Frank got hit once but kept on following his plan to go to school as he normally does. When the second time occurred, he was cautionous but not prepared because he did not think it would happen again but it did. The third time, he reacted.
When trading if you view the stop as a loss, it is a negative state of mind. If it occurs once, twice, three times, etc, sooner or later it will alter your state of mind to a point you will start to react to it instead of following your “game plan”.
For EDUCATIONAL USE. Commodity Futures Trading Commission, Forex, Futures, Equity and options trading has large potential rewards, but also large potential risk and may not be suitable for everyone. You must be aware of the risks and be willing to accept them in order to invest in these markets. Do not trade with money you can not afford to lose. This is neither a solicitation nor an offer to Buy/Sell. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this document. The past performance of any trading system or methodology is not necessarily indicative of future results. All information provide d on the Blog is for educational purpose .
