Do you really understand stop-loss? Learning to stop-loss is the true starting point for profit. From the perspective of human nature, the subconscious inherently rejects risk, and the pain caused by stop-loss can trigger feelings of frustration, self-blame, and negative emotions. Because of this, most people make two fatal mistakes in trading: either they stop-loss randomly, frequently cutting losses and getting thinner; or they refuse to stop-loss, stubbornly holding on and averaging down until they are trapped in a quagmire.
However, from a technical trading perspective, stop-loss itself is a very difficult action to perfect. For example, after a stop-loss, if the price returns to its original direction, not stopping the loss can instead lead to an expanding loss; adjusting the stop-loss position still fails to find the optimal solution. A failed stop-loss not only directly results in financial losses but also easily undermines the psychological defenses, leading to irrational trading, such as emotional revenge and losing the courage to open positions again.
The real dividing line between novices and experienced traders lies in stop-loss techniques. Excellent stop-loss is not just for stopping losses itself, but has three important functions: controlling risk to prevent small losses from becoming large ones; filtering noise to avoid being shaken out by meaningless small fluctuations; and verifying trends to confirm whether the trading direction is valid.
Different trading systems will have different stop-loss methods, commonly including support/resistance stop-loss, for example: relying on key positions, but inevitably being disturbed by false breakouts.
· Moving average stop-loss: commonly used in trend systems, but difficult to cope with severe fluctuations.
· K-line pattern stop-loss: requires a higher level and signal confirmation, otherwise it can easily be pierced by noise.
· Fixed amount stop-loss: simple and crude, easy to control risk, but cannot filter market noise and cannot verify trends. If the trading system itself is chaotic, such as inconsistent levels and unclear signals, then even the most sophisticated stop-loss techniques are of no avail.
Trend-following systems are the most stop-loss-friendly trading systems. From the perspective of stop-loss, trend-following systems are the optimal choice, as they can simultaneously meet the three requirements of controlling risk, filtering noise, and verifying trends. The operational rhythm is clear, reducing unnecessary psychological torment. Once the stop-loss logic is determined, execution is relatively simple.
Regardless of which trading system is used, one must accept a fact: every system has a period of failure, during which decisive and strict stop-loss must be implemented without hesitation. If one chooses to hold on out of momentary luck, even if one is fortunate enough to break even, it will only foster a sense of luckiness and form bad habits. In the long run, this habit is more frightening than a single loss, and it will inevitably lead to greater disasters in the future.
Stop-loss is not a failure, but a necessary cost on the road to profit. One must truly accept from the heart that stop-loss is not a mistake in trading, but a cost that must be paid on the path to profitability. Regardless of which stop-loss method is used, consistency must be maintained to form stable execution power. Frequently changing systems will only trap oneself in a vicious cycle of getting thinner with every cut.
The true trading logic is simple: you can only earn the money you should earn after losing the money you should lose. Stop-loss is not for incurring losses, but to keep you in the market to welcome the profits that belong to you.