In contract trading, having a defensive strategy is extremely important, mainly reflected in the following aspects:

Control Risks

• Limit Losses: Contract trading has high leverage, and market fluctuations can lead to significant gains or losses. Setting up defensive mechanisms, such as stop-loss orders, can automatically close positions at preset prices when market trends are unfavorable, preventing losses from expanding infinitely.

• Protect Principal: The principal is the foundation of trading. Defensive measures can prevent the principal from suffering catastrophic blows due to single or multiple unfavorable trades, allowing traders to survive in the market and wait for better trading opportunities.

Stabilize Mindset

• Reduce Anxiety: With a defensive strategy in place, traders can be more composed when facing market fluctuations, knowing that the risks are within a controllable range, thus reducing anxiety and fear caused by uncertainty, and avoiding making wrong decisions due to emotional impulses.

• Maintain Rationality: A stable mindset helps traders remain rational during the trading process, enabling them to objectively analyze market conditions and follow their trading plans, rather than being swayed by emotions and blindly chasing highs and selling lows.

Optimize Trading Strategy

• Verify Strategy Effectiveness: By setting defenses and observing their triggers, traders can assess the accuracy and effectiveness of their trading strategies. Frequent stop-loss triggers may indicate problems with the strategy that need further optimization or adjustment.

• Determine Reasonable Position Size: Defensive mechanisms can help traders determine a reasonable position size based on their risk tolerance. By calculating potential losses at different position sizes and combining this with stop-loss settings, traders can find a position level that maximizes capital utilization while controlling risks, improving capital efficiency.

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