How to take profit and stop loss in trading?

For any professional player participating in the investment market, the first lesson is not about advanced strategies, but about trading discipline.

What is trading discipline?

That is, we need to solve the three questions: 'What to buy? When to buy? When to sell?'

The first two questions involve many schools of thought, including technical analysis, fundamental analysis, data analysis, sentiment analysis, and news analysis.

This article mainly discusses the issue of 'how to sell'.

First, do a simple math problem: if SOL drops by 10%, how much does it need to rise to break even?

The answer is: 11%.

What about a 20% drop? It's 25%.

What about a 50% drop? It's 50%!!!

It is clear that the rise and fall ratio of the currency has a significant asymmetry, a phenomenon that arises because the geometric average return is lower than the arithmetic average return.

Therefore, 'take profit and stop loss' has become the only way to preserve gains and reduce losses.

In addition to the above advantage, there are two other reasons for taking profit and stopping loss:

It facilitates review; rational trading is always better than impulsive trading. When reviewing each trade, you wouldn't want the notes to say 'bad mood' as an abstract reason.

Over time, you will be unable to objectively improve your trading methods, and thus you will not progress.

Admit your ignorance; taking profit is relatively simple for most people, while stopping loss is much more difficult. Why?

Because stopping loss not only involves accepting financial losses but also implies admitting one's mistakes.

Veteran traders often fail because they are unwilling to admit their mistakes. For example, investors who made a fortune from core assets like AAVE and SOL in the last two years often develop path dependence, mistaking the opportunities of the times for their own ability to see through a certain industry.

In the end, during the downturn, buying more as it falls and even leveraging not only wiped out the original gains but also magnified the losses.

Having said so much, what should we actually do?

In fact, the simplest method is 'fixed take profit and stop loss'.

That is, set a take profit level and a stop loss level based on the buying price.

There is a 25/8 rule. It's quite interesting, let me share it with you.

This means that a 25% gain triggers take profit, and an 8% loss triggers stop loss. As long as the price doesn't hit the take profit or stop loss lines, then just hold on.

To achieve profits with this strategy, you need to ensure that your coin selection win rate is above 25%, as one take profit can offset three stop losses and still have a surplus.

However, for short-term and intraday trading, it is almost impossible to touch the 25% line, so there is no need to strictly adhere to this take profit and stop loss ratio.

You can reset the ratio based on your usual trading patterns. In principle, the ratio of take profit to stop loss should be greater than 3 and not less than 2.

For example, if the take profit is 3%, then the stop loss is 1%. Just scale them proportionally.

The ratio of at least greater than 2 is because participating in a risky investment that can incur losses requires some risk compensation in terms of returns.

At this point, a simple standard for taking profit and stopping loss has been established. Due to space constraints, we will discuss the advanced version of take profit and stop loss in the next issue.

Friends who find this useful might as well follow, see you next time!

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