What is a correct stop loss?
Stop losses can be categorized as correct or incorrect. Only the trading system can measure their correctness.
When the trading system issues a stop loss signal, it is based on a comprehensive assessment from the initial, mid, and final stages of establishing the trading system, optimization, strategies, etc. Executing a stop loss, even if it results in a loss, is correct; failing to execute a stop loss, even if it later leads to profit, is incorrect.
This is not to say that a correct stop loss should be. During periods of small capital, a trading system should not include stop losses; rather, a certain strategy should be employed to temporarily remove stop losses from the trading system. When capital increases, stop losses can be reintroduced. This is because small capital is inherently small; if it doesn't continuously rise—buying today and selling tomorrow—solving the capital issue can take a very long time, during which the losses may exceed the gains, ultimately leading to elimination from the market. Therefore, while stop losses are important, within the framework of a trading system, there should not be excessive stop losses; losses should be managed through capital management.
Another scenario is trading outside the framework of a trading system, where stop losses must be strictly executed; they will only slow down capital loss and will not help in gaining profits. The excessive occurrence of stop losses indicates a fact—insufficient profit capability. At this time, it is not a period for continued trading; rather, one should leave the market to establish and try other trading methods and system approaches. Additionally, frequent stop losses followed by immediate price rises indicate inaccurate analysis of market conditions, where buying is actually a selling opportunity, and buying at stop loss moments is an opportunity to sell. All of these should be addressed within the trading system, which primarily solves various possibilities of rising peaks, falling troughs, rising phases, and falling phases, thus minimizing market risks and uncertainties.
Therefore, stop losses are not that important in the market, especially for strict executors of the trading system. Frequent stop losses also send a signal to us—stop trading.
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