When a trader sets a stop loss they have pre determined how much they are willing to loose on a trade. They are exercising good money management. Hopefully looking at this one trade as one of many and only part of their trading system.
When a trader does not set a stop loss, the way he looks at this trade and maybe his whole approach to trading is lets see what happens. Here is an example of what a no stop trader may be thinking.
Example one:
Trade is placed without a stop loss
Trader thinks he will only risk $500
Trade moves against trader
Trader thinks the trade will come back
Trader is down $1000
Trader adds on to trade because he knows it will come back
Trade is down $1500
Trader adds on to the trade because he knows it is going to come back now
Trade is down $2000
Trader can’t stand the pressure any more
Trader closes the trade and feels good he does not have the pressure any more
Well as simplistic as this example is we know many traders that do this exact scenario over and over because they are afraid of taking a small loss as part of trading. Now lets look at another example of how this trade could work.
Example two:
Trader places a trade with a stop loss
Stop loss is placed at $500.
Trader sees that the trade is wrong
Trader closed trade with $300 loss
Trader reexamines his entry signals
Trader places another trade in the direction of the trend
Trader is up $500
Trader adds on to trade
Trader is up $1000
Trader adds on to trade again because his first possession in this trade is
positive, and the add on possession does not over trade his account
Trader has no pressure
Trader is up by $2500
Trader is looking for an exit point
Trader is in tune with what the market is willing to give
Trader exits the trade with $2600 profit
Trader is on to next trade
By looking at trading as a mechanical system, taking some losses, using good money management, and keeping the emotions out of his trades a trader can go on to a successful trading career. He will make money and have fun trading. Our suggestion is to learn a trading system, follow the rules, stick to basics, grow your account on a systematic basis, have a life other than trading, and enjoy life.