The principles of stop loss benefits you for life(1)
Stop loss, unwelcome for stock investors, sounds uncomfortable. And if you are also very disgusted with this term, then you’ve already buried a huge hidden danger in your investment behavior, like a time bomb, which sooner or later will destroy your investment career.
In fact, stop loss is an important part of a series of trading procedures for a professional investor. There is no emotional thing, only part of the booking plan, like playing video games--performing tasks according to the designed program.
Due to the inherent weakness of human nature, our operations are unconsciously under influence. A big loss is enough to cover the first 99 profits. Therefore, strict observance of stop-loss discipline is the only rule to ensure investors survive in the risk market. Stop loss is a basic skill of securities investment.
The US investment community has a useful and simple trading rule called the Alligator Principle. All successful securities investors in the world are repeatedly training their understanding of this principle before entering the market. This stems from the way the crocodile swallows: the more the prey tries to struggle, the more the crocodile gains. Suppose a crocodile bites your foot; it bites your foot and waits for you to struggle. If you use your arm to try to break your foot, its mouth will bite your foot and arm at the same time. The more you struggle, the deeper and deeper you are. So, in case the crocodile bites your foot, be sure to remember: Your only chance to survive is to sacrifice one foot! If expressed in the language of the market, the principle is: when you know that you made a mistake, you immediately came out. No more excuses, expectations, reasons or any other actions, get out of the game now! In fact, no matter in stock market, foreign exchange market, or options trading, their trading skills are similar at this point. Surviving in the securities market sometimes requires patience and sometimes requires confidence. But patience and confidence do not mean luck. Investors who don't know how to stop loss, aren’t they losing their luck?
What I want to emphasize is that stop loss is scientific and knowing scientific stop loss is the fundamental guarantee for winning in the stock market. The purpose of scientific stop loss can be summarized as: avoiding risk, preserving the principal, and seeking survival.
In fact, the nature of the stop loss is not a direct investment loss, but the essence is the insurance premium paid to the market to protect the security of the principal. It is the cost that the stock market investment must bear. It's like if you bought a private car, you need to go through the insurance procedures first, and you have to pay the insurance premium in advance every year. If you pay 5,000 yuan a year, and your car is safe, will you regret it? Do you think that you have suffered losses?
Controlling risk is the most important guarantee for achieving your goals. A person who just learned to drive, knows how to step on the brakes, is more reassuring than someone who only knows stepping on the accelerator, so that he can learn more quickly. A person who just learned to ski knows how to control the speed of falling is safer and more hopefully become an expert than knowing the speed of indulgence.
However, how many stocks are already in a desperate situation because of the bad stop loss!
The stock market is a risk market. “One win, two flats and seven losses” is normal in the stock market of ancient or modern, of domestic or foreign countries. Whether it is a bear market or a bull market, the two demons of “greed and fear” are entangled in every stock investor. How to control risk will become the first issue for every professional investor. If you want to become a winner in the stock market, you cannot rely on good luck, you must have the skills and ability to continue to profit, and the “bulletproof clothing” to avoid risk. In a word, professionalize yourself, otherwise you will be eliminated by the stock market.
As a professional investor, every operation must be planned. Each time you buy, you must determine three price points, namely: the purchase price, the take profit price and the stop loss price. If this work is not done well, any operation is strictly prohibited!
In the early years of surfing in the stock sea, there were glory of profiteering due to accurate stock selection, and also disasters caused by insufficient understanding of risks and poor stop loss. Between heaven and hell, there is great joy and great sorrow, big ups and downs, meanwhile the weakness of human nature is reflected in the stock market to the greatest extent. After painstaking thoughts, I finally realized the simplest and most well-known reason in this stock market: learning stop loss and being good at stop loss is the basic premise for survival and development in the stock market!