Mental "Stop Loss"
As you are probably aware, a stop order (AKA stop loss) is an order requesting to be filled at the market should the named price be hit. A trader long a futures contract may place and stop order below the futures price to mitigate the risk of an adverse price move. Likewise a trader holding a short futures position may place a buy stop above the current market price as a risk management tool against a possible rally. Once executed, the trader would be flat the market at or near the named price.
Most traders or trading mentors will tell you that you should always use stops; I am not most. I argue that experienced and disciplined traders may be better off without the use of live stop orders and believe that mental stops may be a better alternative. Supporting my assumption is the theory that the dollar amount of the risk on any given trade is conceivably higher through the use of mental stops as opposed to actual working stop orders but the risk in the long rung may be less through the reduction of untimely exits.
The concept of a mental stop is simply picking out a price level at which it is fair to say that your position may have been an incorrect speculation and manually exiting the market once your pre-determined price is hit. Using mental stops as opposed to placing an actual stop loss order may prevent the natural ebb and flow of the market from stopping you out at what ultimately becomes premature.
I am sure that you have all fallen victim to the stop order that was triggered to exit your trade only moments before the market reversed course and left you behind. Not only is this a frustrating place to be, but it often has an adverse impact on trading psychology going forward. Unfortunately, it doesn't seem to be uncommon for inexperienced traders to behave somewhat recklessly in an attempt to get their money back from the very market that took it from them. It is easy to give in to this mentality, but doing so will almost always end negatively.
The use of mental stops requires a considerable amount of discipline and may not be appropriate for all traders and strategies. If you have a consistent problem controlling your emotions (we all fall victim to fear and greed at some point), stop orders are a must. Without them you may be put into a position in which a single losing trade can wipe out weeks or months of hard work, or worse put you out of the trading business forever.
Even those that have an adequate ability to stay calm during unfavorable market moves may find losses pile up in violent market conditions. For example, there are times in which it is very difficult to exit a position once the named price is hit without considerable financial suffering. If you are not mentally capable of accepting this possibility, placing outright stop orders may be a better alternative for you despite its limitations. Remember, if successful trading is largely determined by the mental capabilities of a trader it is imperative that you know yourself well enough to steer clear of situations that may lead you to behave emotionally as opposed to rationally.
Figure 2: Mini Russell 2000 future - Stop loss orders are a great way to minimize futures market exposure, but I believe them to be a great source of frustration as well. If you are disciplined it may be better to work without stop loss orders.