Many traders often face a question before placing an order: I feel very sure about the direction of this market; can I not use a stop loss? At worst, I can withstand a short-term drawdown and wait for the price to come back up. But in reality, a stop loss is never a tool used to 'validate the correctness of the direction'; it is the 'risk lifeline' defined for each trade — it determines how far you can go in the market, not how much you can earn at any moment.
Comparing trading to running a business may make it easier to understand. If you open a small store, you wouldn’t allow a single purchase to lose enough to wipe out your principal investment. The stop loss is your predetermined 'principal safety line' for each trade: when losses reach this line, it means this 'business' has exceeded your risk tolerance. Continuing to hold on will only drag down the overall principal, and timely stop loss is like 'shutting down this losing deal' to preserve your strength for the next opportunity.
A truly worthwhile trade must adhere to the logic of 'risk and reward matching':
- High-quality trades often involve 'small drawdowns for large spaces'—the drawdown can be firmly held, while the potential gains can create a significant gap, akin to using a small amount of capital to gamble for high returns, which is a 'profitable business';
- Moderate trades, even if the stop-loss space is slightly larger, still have participation value as long as the future increase can cover the risk, equivalent to 'small profits but no loss of principal';
- Those trades that require enduring huge drawdowns but have limited potential gains are essentially 'losing deals'—you might have to bear a 20% loss while only hoping for a 5% gain, regardless of how 'accurate' the direction is, it is still a consumption of the principal.
Once you abandon the stop-loss, risk management will completely spiral out of control. On the surface, it seems that you have avoided the trouble of 'frequent stop-loss triggers', but in reality, you will gradually fall into two misunderstandings: first, the judgment of trading opportunities becomes increasingly lenient, and you start taking on high-risk trades that you originally would not consider; second, your tolerance for losses increases, and when it is time to exit, you still cling to the hope that 'if I wait a little longer, it will bounce back'.
The final result is often that you could have exited at a loss of 5%-6%, but due to unwillingness to cut losses, you helplessly watch the loss expand to 40%-50%, with substantial shrinkage of principal, even falling into the dilemma of 'passive holding, waiting a long time to break even'—while the market never lacks new opportunities, the deeply trapped principal has long lost the chance to seize the next wave of market movements.
In fact, the stop-loss has never been an isolated 'life-saving measure'; it must be bound with the entry point and target price, forming a complete 'trading calculation logic'. Before entering the market, think clearly about three questions: 'What is the maximum I can lose (stop-loss)?' 'How much can I earn (target price)?' 'Is this trade worth it?', once you understand these, placing an order is not about gambling on luck.
Once you understand this, you will no longer be entangled in 'whether to use a stop-loss', but instead will regard the stop-loss as the 'foundation' of your trading system—without it, no matter how perfect your market judgment or how attractive your profit expectations are, it could collapse into a loss disaster. Using a stop-loss is not a compromise but a responsibility to the principal, and it is also a prerequisite for long-term survival in the market.
