What do people consider the most important in trading? The entry point, the exit point, profit-taking, or stop-loss? Today we will analyze the methods of setting a stop-loss. The definition of stop-loss varies from person to person. Recently, I have discussed with many friends who are engaged in trading about how to set a stop-loss. Traders with different trading styles have given many definitions to the stop-loss.

Not setting a stop-loss is the most common problem for trading novices. Being able to discuss the issue of stop-loss indicates that we have already gained some insights in trading and understand the principle of risk first.

In fact, a stop-loss is a mechanism to correct your own mistakes. Unless you are always right, without a stop-loss, you will suffer greatly. Because only the market is always right, everyone will make mistakes, so everyone must have a stop-loss.

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You may have heard this saying, that is, you must learn to set a stop-loss in trading.

This saying is actually not wrong at all, but many people have learned it in the wrong way.

The idiom "Dong Shi imitating a frown" cannot even describe the absurdity of their learning results.

Some people say that after buying, you must not allow a loss exceeding 10%, otherwise, you should stop-loss immediately. If you do not stop-loss, the loss will continue to expand.

Cutting off the loss before it expands and ending the trade with a smaller loss is the most effective way to protect funds, and there is no other way.

But some people say, no, the theory I heard is that the loss should not exceed 20%, and only when the loss exceeds 20% is it necessary to stop-loss.

At this time, some people say, you are all wrong, I learned from a short-term trading master a while ago, and his stop-loss line is only 3%, and he must stop-loss if it exceeds 3%.In addition to this, the popular stop-loss rates on the market include 5%, 8%, 15%, and so on.

Are these people right or wrong?

Each of them is correct, but also incorrect.

The essence of the stop-loss theory is by no means to sell when you lose, nor is it to discuss how much loss is appropriate to sell.

What is a stop-loss?

A stop-loss is a mechanism to correct your own mistakes; unless you are always right, without a stop-loss, you will suffer greatly.

Only the market is always right, and anyone can make mistakes, so anyone must have a stop-loss.

However, the form of stop-loss is different.

I have always emphasized one sentence: you must understand why a stock rises.

Because only when you understand why it rises, can you know whether its future decline is a real fall or a false fall.If you're not clear about it, or if your understanding is not comprehensive enough, no matter how much money you make in a bull market, you will eventually give it back.

There is a common sense that everyone must understand: the bull market is the main reason for retail investors' losses.

Make sure you see clearly, it is the bull market that leads to retail investors' losses, not the bear market, I didn't write it wrong.

Because only in a bull market, after a sharp rise, will retail investors enter in large numbers.

And then there is no more.

In our stop-loss operations, we often encounter these two problems:

1. No stop-loss at all. After the order is trapped, it is carried on the single, and even the position is increased against the trend. Doing this is no problem in the volatile market, but it is doomed in a one-way market, especially in recent years, there are many black swans, and serious losses, even blowing up the warehouse, often occur.

2. Cannot stop loss correctly and reasonably. Due to improper methods, stop-loss is frequent in trading, there are many wrong orders, few profitable orders, the success rate of the trading system is very low, and the account continues to lose money.

Misunderstandings about stop-loss1. Losses Can Be "Dragged" Back

Investors often hesitate and harbor false hopes when facing losses, abandoning their stop-loss plans in the hope that by delaying, they can wait for the market to turn around and "drag" the losses back. This is especially true when the losses are substantial, as they may find it psychologically hard to accept and hope that by delaying, they can reduce the extent of the losses. This is the most difficult to overcome and the most common psychological misconception in futures trading.

In fact, every trade has an optimal timing and position for a stop-loss. Once missed, not only can the initial loss not be recovered, but it may also lead to significant losses. Especially when losses occur from contrarian operations, it is even more necessary to make a decisive decision and strictly implement the stop-loss, which is the so-called "not afraid of being wrong, just afraid of dragging."

2. Stop Small Losses, Suffer Big Losses

Some investors, after gaining certain trading experience, often overestimate their ability to stop losses and fall into the misconception of "stopping small losses, suffering big losses." For example, they can stop losses in a timely and rational manner when the loss is within 10%, but when the loss exceeds 50%, they are unwilling to stop the loss.

In volatile market conditions, investors may become confused in their judgment and decision-making, unable to issue stop-loss orders in time, and once they miss the preset stop-loss position, it becomes difficult to execute the stop-loss. Regardless of the size of the loss, as long as it reaches the preset position, it should be executed immediately without delay. The effectiveness of the stop-loss largely depends on the investor's self-discipline. Only by strictly adhering to discipline and stopping losses in time can one continuously improve their investment ability in trading.

3. Frequent Stop-Losses, the More You Stop, the More You Lose

Most novices entering the futures market, after suffering losses due to not stopping losses in time, will generally learn their lesson and strictly formulate stop-loss principles. However, due to the "once bitten by a snake, ten years afraid of a rope" mentality, they are prone to fall into another extreme. This is because of unfamiliarity with the market and lack of confidence in trading, setting stop-losses without a pattern, frequent losses, and frequent stop-losses.

The harm of this misconception is also huge. No matter how large the capital, no account can withstand long-term losses. What's more serious is that when the capital decreases, investors may gradually lose their confidence in analysis and trading, always hesitating between stopping losses and not stopping losses, and finding it difficult to formulate and implement reasonable stop-loss plans.

To prevent this from happening, investors should first familiarize themselves with the market rules and price fluctuation characteristics of any trading product before trading, and formulate different stop-loss strategies and positions according to different products.4. Blindly Chasing Rebounds

Individual investors in a bear market generally suffer more losses than gains. Some individuals, in an attempt to recoup their losses, will try to catch rebounds to alleviate their losses. However, rebounds in a bear market are often fleeting. If not handled properly, they may incur even more severe losses. Therefore, individual investors must be extremely cautious.

5. Blindly Supplementing Positions

For many individual investors, they will use the method of supplementing positions to reduce costs and minimize their losses. However, in a bear market, due to the sluggish market, supplementing positions may not be effective and may even push oneself to the brink of being trapped. Therefore, one must be extremely cautious.

So today, let's talk about how to correctly and reasonably set a stop loss.

Firstly, a stop loss does not exist in isolation. It must be accompanied by your overall trading strategy, and the stop loss is just one part of it.

When considering the method of setting a stop loss, we cannot only consider the stop loss point. It must be coordinated with the entry point, the profit-taking point, and the fund management to achieve the best effect.

There are mainly two types of technical methods for setting a stop loss: one is to combine technical indicators. Use support and resistance positions as stop loss points, use the previous high and low as stop loss points, use technical indicators such as moving average prices as stop loss points, and so on.

The other type is to use the stop loss amount as the standard. It is mostly used in the logic of left-side trading, for example: in the bottom-fishing transactions, if a reasonable technical position cannot be found for the stop loss, a fixed amount is calculated. When the order enters the market and the loss reaches the standard of the stop loss amount, the order is stopped and exited.

Three Major Stop Loss StrategiesTranslate the following article into English:

1. Tangent Stop Loss Method

Tangents are a very important analytical tool in technical analysis, including support lines, resistance lines, golden section lines, percentage lines, speed lines, Gann lines, etc. The most commonly used and simplest one is the support line stop loss, that is, after the stock price forms a support line, once the stock price effectively breaks through the support line, it indicates a technical breakdown, and at this time, holders should decisively stop loss and exit.

For example: In the weekly K-line chart of Xiamen Construction Machinery Co., Ltd., after forming a double bottom in late May 2010, the stock price rebounded and formed a standard upward channel, with its lower rail being an important support line for the stock price. Since then, the stock price has steadily risen along the support line, resulting in a mid-term trend with a large increase. In mid-March 2011, the stock price touched 18.26 yuan and then fell back to test the lower rail of the channel. However, from April 29 to May 6, the weekly K-line finally broke through the lower rail of the upward channel, indicating the loss of the support line and a reversal of the trend. At this time, holders should take the opportunity of the rebound to decisively stop loss or take profit and exit. Subsequently, the stock price indeed entered a large-scale adjustment.

2. Moving Average Stop Loss Method

Generally speaking, the 10-day moving average can maintain a short-term trend, the 20-day or 30-day moving average can maintain a mid-term trend, and the half-year line (125-day moving average) and the annual line (250-day moving average) can maintain a long-term trend. If you are a short-term speculator, you can use the 10-day moving average as the stop loss point; if you are a long-term buyer, you can refer to the half-year line and the annual line as the stop loss point; for medium-term investors, the 20-day moving average is more important in practical application. If investors buy at the lower rail of the upward channel, they can wait for the end of the upward trend to close the position and set the stop loss near a relatively reliable moving average. If the stock price has always been above the 20-day moving average and the 20-day moving average is rising, there is no need to worry about its minor adjustments. During the rise, the stock price will always stop above the 20-day moving average after a slight adjustment. After losing the upward energy, the stock price begins to adjust or move sideways, and the 20-day moving average will gradually change from rising to flat. At this time, it should be highly vigilant. Once the stock price effectively falls below the 20-day moving average and cannot return to the line within 3 days, it should be stopped immediately.

For example: In the daily K-line chart of Guohai Securities, after the stock price bottomed out at 3.90 yuan, it rebounded with fluctuations. Among them, the 10-day moving average is the dividing line between the strength and weakness of the short-term trend, and the 20-day moving average is the dividing line between the good and bad of the mid-term trend. In early May 2012, the 10-day moving average was lost, and the market entered a short-term fluctuation period, but the 20-day moving average was not broken. After a short-term fluctuation, the market still maintained a fluctuating upward trend. At this time, short-term or appropriate adjustment strategies can be made, but medium-term investors can continue to hold shares. Until June 28, the stock price broke through the 20-day moving average, this mid-term upward lifeline, indicating that the market phase has reached the top. At this time, medium-term investors should decisively stop loss or take profit and exit, waiting for new opportunities.

3. Pattern Stop Loss Method

Once the stock price breaks through key positions such as the neckline of the head and shoulders top, M head, triple top, or the lower edge of the box platform, it indicates that the head pattern is established, and at this time, a decisive stop loss should be made to exit.For example: In the daily K-line chart of Ansteel Shares, after surging to 16.20 yuan in early December 2009, it failed to reach new highs twice, forming a double top pattern. On January 20, 2010, the stock price effectively broke through the double top neckline of 13.70 yuan with a medium bearish line, signaling the peak of the market. At this time, investors should decisively sell their shares and wait on the sidelines. After that, the stock price accelerated its decline. In early February 2010, after the stock price stabilized around 11.00 yuan, it entered a horizontal pattern. After three attempts to rise, the head and shoulders bottom pattern took shape. On April 19, the stock price fell sharply with a medium bearish line, effectively breaking through the neckline of the head and shoulders bottom, presenting a good opportunity for short-term stop loss. After that, the stock index fell further, breaking through 7.00 yuan before getting a short-term breather.

Stop loss is the key to reducing risk. Please keep the following two points in mind:

(1) Must set a stop loss point

Never start a trade without setting a stop loss. There is no stock that only makes a profit and does not suffer losses. When investing in the stock market, it is necessary to always be aware of the risk. The most basic risk awareness is to determine how much you can afford to lose before buying - set a stop loss point.

(2) Adhere to the preset stop loss point

There are very few investors who can strictly discipline themselves to do this. Because selling stocks at the stop loss point means admitting one's own mistakes frankly, and most retail investors are often too confident in the stocks they hold, and still harbor illusions in the face of judgment errors.

Many people will think that in trading, of course, we should choose the method that makes more profits. However, we must consider the psychological aspects here. If a stop loss method is too complicated, difficult to execute, or very stimulating to one's mentality, such a method can only exist on paper and cannot exist in real trading.

For example, if the stop loss method is too aggressive, the stop loss space is too small, although the profit and loss ratio is reasonable, the success rate is too low. If we keep making mistakes and losing money in trading, it will severely hit our confidence in trading. We are very likely to lose our execution power, leading to the failure of trading. This situation is most common in trend-based trading systems.Of course, if you have a very strong inner self and a high tolerance for dealing with losses and stopping losses, then you can adjust the parameters yourself and make the trading more exciting. However, most of us are better off setting more conservative stop losses and sticking to them for a while, and you will definitely be pleasantly surprised by the results of your trading.

The method of setting a stop loss is very simple: adhere to two principles: making money and being easy to implement. Don't be greedy, and you can make money.

True Stop Loss

Stop loss is the essence of trading and is a skill that any trader must learn.

But my understanding of stop loss is that you first need to understand why you want to buy a stock. The theoretical basis comes from Buffett's approach, but you don't necessarily have to hold it for 10 years. If you buy based on speculative theory, you can also regard it as the theoretical support for buying.

Then, you need to constantly observe whether this support is still there.

If you buy based on the logic of the "death squad" of hitting the board, then the stock price must rise, and as long as it falls a little, your buying logic is gone.

When the logic of buying has been lost, you should naturally sell.

If your buying logic is Buffett's approach, holding long-term is to enjoy dividends and share the growth of the company.

As long as the dividend rate is appropriate and the company is growing, you should not sell.Instead, if the dividend rate drops to a level you can't tolerate, or if the company loses the growth you expected, then you must sell.

This is why it's crucial to understand the reasons for buying a stock before you make the purchase.

If you're not clear about why you're buying, you'll naturally sell in a confused manner.

It's only fair that you take a loss.

I'm familiar with very few stocks.

Initially, there were 20, then only 10, and later only a few.

Because I'm the only one doing research, without a large team of researchers to gather information for me, it's quite good to focus on a few.

Each one must be thoroughly understood, spending several months to do so.

If you don't understand it, you have no idea how to operate.

Should you cut your losses if it drops by 3%?Stop loss at a 10% drop?

Stop loss at a 20% drop?

Do you really think it's a joke to operate your precious funds based on such principles?

When did the secret to making money become so simple and cheap?

Stop loss is really a tool for cutting the "leeks" (a Chinese slang for inexperienced investors). Half-hearted investors who insist on stop loss and novice investors who never stop loss will both be completely cut off.

What should novices learn the most?

Based on my experience, they should not learn to stop loss, but to hold on to profits.

The weakness of human nature lies in the aversion to loss, an extreme aversion to loss, but being insensitive to profit.

If you don't sell, you are just at a floating loss.

If you sell, you are at a real loss.I can accept not making money, but I cannot accept any losses; it's just unbearable to watch.

Therefore, many beginners will try to sell their profitable stocks as much as possible to cover the loss-making stocks.

Only when they are tortured to the point of despair will they sell at a huge loss.

At this time, new investors will take two paths:

The first path is to be utterly heartbroken and then completely quit the stock market.

The second path is self-evolution, find a few books, learn a term called "stop loss," and become a half-baked investor.

Investors who take the first path will curse that A-shares are just swindlers.

Investors who take the second path, after frequent stop losses and countless losses, become desperate again and continue to curse that A-shares are just swindlers.

Then, many half-baked investors decide not to stop losses anymore and start to hold on stubbornly.

And then...You can see that once new investors step onto the wrong path, the ultimate result is that only one in ten will survive, whether they know how to cut losses or not, the casualties are heavy.

The best approach is to avoid this path from the start, which means learning to hold on to profits from the very beginning.

For the stocks that are making you a lot of money, don't be afraid of their high prices, hold on patiently, perhaps the profit from one stock is enough to offset the losses from ten other stocks.

If you can also continue to add to your position in this profitable stock, that's even better.

How tragic the fate of investors who keep buying more on the way down, you must have heard about it.

Some people read my weight loss secrets upside down, as if they were weight gain secrets.

Why don't you take those investors who keep buying more on the way down as a negative example, and turn it into a get-rich secret by reading it upside down?

Of course, all of this only applies to the field of value investing.

If you're in the field of price speculation and you use the strategy of adding more on the way up.

I'm sorry, you will still end up in a very bad situation.I won't go into the principles; use your brain and think about why.

After understanding all the above principles, you can summarize a real stop-loss method, or rather, a stock trading method.

First, select stocks in the field of value investing.

The dividends should be good, the performance should be excellent, the valuation should be low, and the historical growth should be very stable, at least 5 years of well-known blue-chip stocks.

Then, buy a small position and do a test.

If everything is normal, then at this time next year, you will make at least 8-10% profit on it, and there might be a 2-3% cash dividend.

During this test phase, there is no such thing as a stop-loss, completely according to Buffett's theory.

First, when you buy, you have already confirmed that this is a company with good dividends, excellent performance, low valuation, and stable historical growth, and you plan to hold it for 10 years.

Then, the position you hold is just a test position, the position is very light, only 1/10 or even 1/20 of your total position.

There is no need for a stop-loss, on the contrary, you won't lose much, and no matter how much you lose, it will come back sooner or later.When you find that several of the white-horse stocks you are testing have performed exceptionally well, don't ask why, just increase your position.

The strong get stronger; as long as the price is within a range that can be understood in terms of performance, the more aggressive the increase, the heavier the position should be.

Just think of it as the antonym of buying more of a junk bubble stock when it falls; this should be easy to understand.

However, once the price exceeds the range that can be understood in terms of performance, it enters the stage of speculative bubble.

At this stage, there is a stop loss.

To be precise, it is taking profits, because your base position is very low, and you will never build a high position.

According to Buffett's theory, you should take profits at this stage and should not participate at all.

But China is, after all, China, and its speculative atmosphere is much stronger than that of the United States, which is a characteristic of the national condition and cannot be changed in the short term.

Speculation does have risks, but the speed of making money is intoxicating.Achieving a 15% annual growth in the performance of a white horse company is challenging; a normal expectation is an average of 10% per year. However, during the bubble phase, it's not difficult for the stock price to increase by 100% in a year, far exceeding the growth rate of performance. It's a pity to give up during this phase. Therefore, it is necessary to participate in the bubble phase, but one must not hold onto stocks according to Buffett's method.

At this time, taking profits should follow the logic of stopping losses, but not mechanically by a certain percentage, but rather based on market sentiment. You said it yourself, this is a bubble. Since it is a bubble, the market sentiment must be frenzied. As long as the sentiment is there, and everyone believes the company is outstanding, the stock price will definitely rise.

Do you know why speculative stocks need to fabricate stories?Do not fabricate stories, nor describe the company's prospects as extremely optimistic; how can market sentiment become frenzied then?

It is difficult for blue-chip stocks to become frenzied, but the method of dealing with them when they do is the same.

As long as market sentiment cools down, then leave; otherwise, stay put. It is by no means a mechanical observation of proportions.

This is my approach and also my principle for cutting losses.

Let me give a few examples.

China Merchants Bank, Ping An Insurance, and Midea Group are in the realm of value investing.

At this stage, the principle is to never cut losses on experimental positions, buy whoever rises, and operate in the opposite way of replenishing positions when falling; this is the most probable way to profit.

Wuliangye and Kweichow Moutai are in the realm of price speculation.

The principle at this stage is to cut losses and do so at the right time. If you do not cut losses against the trend, it will cause you unbearable pain in a matter of minutes.

Of course, for me, it is about taking the opportunity to take profits.Do not consider it complicated; the two points I mentioned are already very simple and straightforward. The actual operation is even more diverse and adaptable.

Otherwise, what do you think is the empty cup mentality, what is a test position, and what is the principle of upgrading a test position?

Finally, let me tell you a widely recognized fact.

During the investment phase of stock investment, everyone benefits, and no one loses money. Holding stocks like Buffett, it is harder to lose money than climbing to the sky.

By slightly allocating position ratios and continuously upgrading test positions, your profits will come comfortably. Not only will you make a profit, but it will also be substantial, making it most suitable for beginners.

In contrast, stock investment during the bubble phase is a zero-sum game. In the end, only a few people can survive and leave the battlefield, taking away the wealth of everyone else.

It is the fastest way to make money, but also the riskiest.

Stock trading is about playing the odds; investing is an art, an art similar to warfare.