I will discuss the true meaning of this statement from several aspects.
(1) The loss must be clear
Those who enter the market without sufficient mental preparation often lose money in a confused manner, which means they have lost without understanding. I once witnessed this in 1994 when the coffee prices surged in the U.S.; a client held a full short position and anxiously shouted at the trader on the computer, 'Get me out of this!' How to get out? Soon, within minutes, they were kicked out of the futures market. Isn’t this a misguided loss? This client did not understand how to set a stop-loss, nor did they know how to assess the situation to exit with a loss. Not knowing how to control risk, is it not a loss without understanding? This was this client’s first trade, and I never saw them again. I think perhaps they are no longer connected to futures! Because in the end, they still did not understand how this happened; futures became nothing but a memory of disaster and fear for them.
What does it mean to have a clear loss? It means being fully aware of the huge risks and then following your plan, your thoughts, and your expectations to incur a loss. This may sound unpleasant and almost like a joke, but it is not. I am not asking you to actively seek loss, nor am I suggesting that you aim to lose money. The goal is, of course, to make money. What I mean is that we should always have a specific plan: if the market goes against you, at what price will you exit, and how much will you lose upon exiting? It’s rational to acknowledge losing a battle. But this does not mean we have lost the entire war. There’s no need to rush; opportunities will come one after another, as long as we still have the strength, we will win. What I mean by having a clear loss also includes: you should understand in advance how losing this amount of money will affect your overall operations, whether it will have a significant impact, and what adjustments are needed in strategy and tactics. It also includes the impact on your mindset.
(2) The loss must be justifiable
Not every losing trade in the market is a bad one, and not every winning trade is a good one.
A good trader knows how to incur justified losses and earn with rules. What does it mean to incur justified losses? First of all,
The profit-risk ratio must be reasonable, which is a matter of how much risk to take for how much profit. For example: if the market goes against you and you prepare to take a loss of 30,000 yuan to exit. If it goes in your favor, you can earn 3,000 yuan before reaching the next resistance and support level. Is this a good reason to enter the market? If the market goes against you and you indeed take a loss, I would consider that you lost without justification, because you took a risk ten times greater than the profit you sought, seemingly completely forgetting the principle of risking little for the chance of gaining much. You are *“risking big for small gains,” even if you win nine times in a row, it won’t be enough to cover one loss.* But how confident are you in winning consecutively? With this mindset, you’ve already seen the outcome before entering the market. If we consider the profits from both sides
If you adjust the risk ratio, don’t you think the loss becomes more justifiable? Secondly, you should set the *exit price for loss at an effective support and resistance level, meaning you should identify a point at which to exit with a loss, giving yourself a reason to hold your position against the risk.* The key point is the price level where the bulls and bears are fiercely contested; at this point, we can validate the overall trend with minimal cost. The futures market often showcases classic scenarios of risking little for large gains at these fiercely contested points. Thirdly, if there is a rapid upward movement or a sharp downward trend, you need to follow the trend; the above two conditions become irrelevant. What to do?
1. Follow the trend with small positions and gradually increase the position as the market continues in the expected direction; the primary consideration in this approach is risk control.