Today I will talk to you about the cliché topic of stop loss. The reason why I want to talk about this topic is that I found that many foreign exchange friends do not attach importance to stop loss, or do not understand its importance.
We often see that after a transaction has a loss and stops the loss, the market develops in the direction we expected before. If there is no stop loss before, not only will not lose money but also make money, so many people are unwilling to stop the loss. Think that stop loss is the root cause of account loss, so stop loss is rejected.
This creates a misunderstanding of stop loss. The above situation is actually not a problem of stop loss, but a problem of wrong judgment of entry position, or it may be a problem of inappropriate stop loss position.
So, if we want to have a correct understanding of stop loss, we must first clarify what is stop loss? What is the function of stop loss?
Stop loss is a means of risk control, that is, when you analyze, judge and take action on the market, but it is proved to be wrong by the market, or when your entry basis is destroyed, admit your mistake and accept it. Loss, and limit the loss to a smaller range, so as to avoid greater losses and endanger the safety of the total funds.
That is to say, stop loss is a protective measure, which is equivalent to a "safety valve". Its function is to protect the total funds of the account. When unexpected situations occur and losses occur, you can withdraw in time.
Even after the exit, the market develops in the expected direction again, there is no way to do it. Because no one can predict what will happen in the future, all we can do is to analyze, judge, and then make decisions based on all the information we can collect at the moment .
For example, in the stock market, after many people buy stocks and make losses, they adopt an ostrich policy, and then the stocks are held for five, ten, or even longer periods of time. This not only reduces the efficiency of the use of funds, but more dangerously exposes these funds to the risk of losing everything.
Or some people choose to "cut the meat" when they really can't bear the protracted suffering after suffering a large loss.
These are actually the results of no initial stop loss measures.
And even the master of value investing, Buffett, will take stop loss measures after making a wrong judgment.
At the end of February this year, Buffett increased his holdings of aviation stocks, and then affected by the epidemic, when the stock price plummeted by nearly half in early April, he decisively cleared his positions. Because the basis for him to continue to hold positions no longer exists.
This is true in the stock market, not to mention the highly leveraged margin market and futures market? Stop loss is even more significant in a highly leveraged market, because under the effect of high leverage, the risk is proportionally magnified.
Therefore, stop loss is a very necessary and important measure you take to reduce risks when the market is facing unexpected conditions.
Many people think that trading is buying and selling, which is a very simple matter. But in fact, trading is definitely a science, not a simple and easy thing.
Because trading is what allows us to fight against the human instincts contained in the genes of human evolution over millions of years-greed and fear! The difficulty of this can be imagined.
So don't take it lightly, but attach great importance to it; and don't fall into the kind of "tactical diligence, strategic laziness".
What does that mean? That is to say, it is not enough to study diligently every day (not to mention those who do not even study diligently), but also to plan the "transaction" at the strategic level.
We come to this market to trade, to put it bluntly, it is all to make money. But we must first ensure that we can "live" in the market, that is, not liquidate (not go bankrupt), or minimize the probability of liquidation; and then make money. (The non-exploitation mentioned here means that all the funds you can use in trading will not be lost.)
So how can you ensure that you don't liquidate your position and "live" in this market forever?
Let's talk about how we plan at the strategic level, achieve the purpose of risk control at the level of fund management, and minimize the probability of liquidation.
Mathematicians and many traders have done in-depth research on liquidation risk (bankruptcy risk), which is the basis of money management.
The purpose of fund management is to reduce the risk of liquidation, and there are three variables that affect liquidation:
1. Winning rate; the winning rate of the trading system.
2. Profit-loss ratio (return rate); the profit-loss ratio of the trading system, or the rate of return.
3. Risk percentage (stop loss percentage); the risk of each transaction accounts for the percentage of total funds, or stop loss percentage.
Trading technology systems can address the first two factors, while money management can control the third factor.
When the win rate or profit-loss ratio increases, the risk of liquidation decreases; and the greater the risk percentage per transaction, the greater the risk of liquidation.
The following quotes two bankruptcy risk tables for comparison and explanation. The algorithms they adopt are consistent. The first one is the data obtained from 100,000 computer simulation tests, and the second is the data obtained from 1,000 computer simulation tests.
The first one cites the bankruptcy risk table from Bennett A. McDowell's "A Trader's Money Management System":
The second cites the bankruptcy risk table from Tushar Chand's "Beyond Technical Analysis":
From these two tables, it can be seen that under the assumption of the same win rate and profit-loss ratio, the higher the risk percentage of a single transaction, the higher the risk of liquidation.
And if we want to reduce the probability of liquidation as much as possible, we must reduce it to 0, so it is recommended that you control the risk percentage (that is, the stop loss percentage) of each transaction at about 2% of the total funds, so that you In order to "live" in this market as long as possible.
Then use this stop loss amount to divide by the stop loss spread to calculate the trading volume (position) for each entry.
Of course, if your trading technology system is very powerful, not only has a high winning rate, but also a high profit-loss ratio, then you can appropriately increase the risk percentage.
And if you don’t have a complete trading technology system and you can’t know your stable winning rate and profit-loss ratio, then you should be more cautious and adopt a stop loss percentage of 1.5%, or even 1%, so as to be more secure .
Doing trading is playing a game of probability, so if you want to do a good job in trading, you must have a little mathematical thinking, and the study of fund management is about numbers and probability. From the mathematical principles, let us live as long as possible in this market.
In fact, we can regard the stop loss as the cost of the transaction, and the profit-loss ratio is - how much cost are you willing to pay for each transaction to make a profit , of course, the larger the ratio, the better.
As the Tao Te Ching says: "If you take what you want, you must give it."
If you want something, you have to give something first.
If you compare trading to fishing, then stop loss is your bait for fishing in the financial market .
Obviously, using an earthworm to catch a carp is a cost-effective thing; but if you want to catch a carp and use a bear paw as bait, it can only be said that ordinary people in the world of "local tyrants" cannot understand......
The truth is understood, so how should we usually do a good job of stop loss ?
First, formulate admission principles. That is to clarify your entry conditions, and use your method to clarify what happens in the market before entering the market. The clearer the better, formulate them into principles.
Secondly, the stop loss position must be determined before entering the market. Before you enter the market, you must first assume that when the market triggers your entry conditions, you will enter the market at what price. When this condition is broken, that place is the stop loss position. For example, the trend line technical system is to enter the market with a line, and the stop loss is set outside the trend line. The specific stop loss position should be set reasonably according to the technology you use. Then divide the 2% stop loss amount mentioned above by the price difference between the entry position and the stop loss position to calculate the position and formulate a trading plan.
Finally, strictly follow the trading plan. When the entry condition is triggered, immediately enter the transaction, and directly set the stop loss position and strictly implement it.
Only by doing a good job of stopping losses and controlling risks well can we "live" in this market for a long time, and then pursue technical improvement, and then making money is a natural thing.
So what if you know the truth, but you still can’t do it?
That can only persuade you to leave the market. This place is not a place where the weak can survive. This is a place where the strong prey on the weak and the fittest survive; or you should try to change yourself and make yourself a strong one!
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