Super practical! These 4 stop-loss strategies can solve more than 80% of the los
2024-04-13
Most of the losses in the market are caused by improper timing of entry and exit. For most traders, exiting the market may be the most difficult part of trading. Despite the repeated emphasis by some experienced traders on the importance of establishing exit principles, there are still many traders who enter the market rashly without setting a stop-loss point or profit target, resulting in heavy losses. Experienced traders have summarized the following four ultra-practical stop-loss strategies that can help the vast majority of traders solve more than 80% of the loss problems.
1. Indicator Stop-Loss Method
As the name suggests, this stop-loss method is based on indicators. Many predictive indicators used in trading are intraday indices in the market, such as up/down, new high/new low, and trading volume. The relationships between these indicators and between indicators and prices are always changing, so traders spend a lot of time testing to determine the relationship with the expected price trend.
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Most of the time in establishing this strategy is spent answering such a question: What happens when these candidate indicators reach extreme values? Is it the continuation of the price or the reversal of the price? This information can greatly improve the trader's stop-loss strategy.
When creating an indicator-based stop-loss, if the price breaks through a new high or falls to a new low (if you are shorting at its new high or longing at its new low), then you should exit the trade, even if the current price has not yet reached the stop-loss level you set. If you spend time studying intraday indicators in different time periods, you can also create your own technical indicator stop-loss points to adapt to your trading style and method.
2. Time Stop-Loss
A time-based stop-loss strategy means making short-term trades when the price momentum rises in the expected direction. If the price direction is judged correctly, then the profit should be achieved quickly. On the contrary, if after going long, the price does not rise, or even a slight decline occurs, it indicates that the interpretation of the price direction is wrong, and the assumption is falsified at this time.
For example, design a trading system with a holding time of 21 minutes to capture a profit of 3 points. If the expected profit is not achieved within 21 minutes, exit the trade immediately, even if the current price has not reached the set stop-loss price. This time-based stop-loss allows traders to pause trading in time, without having to wait until they lose one or two points before stopping.
The risk, return, and holding period of each trade are directly proportional. When designing a trading method, consider the holding period to make your method suitable for your risk tolerance. Once the system is established, the time-based stop-loss has been established, and it will complement the price stop-loss strategy mentioned later.III. Price Stop Loss
Most traders are familiar with price-based stop-loss strategies, as price is the most apparent indicator that allows investors to feel the direct loss. When time and indicators fail to exit a trade, price-based stop-loss is used as a last resort.
Treat each trade as a hypothesis. If you go long on a one-minute chart, consider a previous low as a potential low point. In such a case, you would set a stop-loss at the previous low point when establishing a position. At this time, the assumption is that the previous low is an important point and the first retest during the upward process. If the price returns to the previous low, the hypothesis is falsified, and it is necessary to recover the remaining funds and exit the trade with a stop loss.
The key to making this price-based stop-loss operation is to set your stop-loss point near the assumed high or low point, so even if your hypothesis is falsified, the loss will not be too great. In short-term trading, this means that traders need to check the one-minute and five-minute charts and consider the market maker's quotes for buying and selling.
IV. Capital Stop Loss
Capital stop loss is a stop-loss when the invested capital incurs a certain amount or ratio of loss. The advantage of this stop-loss method is that it is relatively rational, can avoid significant capital losses, and can also give oneself a psychological expectation of loss, making the trading more calm and composed. The following are three ways to implement capital stop loss:
1. Fixed amount stop loss: Sell when a position incurs a fixed amount of loss, regardless of what happens afterward. The loss to the set amount is the first principle, and everything else is secondary. This can effectively control trading losses.
2. Fixed amount stop loss within a fixed period: Set a specific daily or weekly loss limit for a position. This allows oneself to calm down when trading is not going well, re-think where the trading mistakes are, and regain a calm mindset before trading again.
3. Total capital stop loss: Only put the capital that can be afforded to lose in the account, that is, all the funds in the account can be lost, but no additional funds will be added. The capital management thinking of this stop-loss method is outside the market, not inside the market, which is a very rational stop-loss method.Summary
Due to the inherent uncertainties in the market, no matter how rich your trading experience or how superb your trading skills are, it is impossible to completely avoid the probability of losses. Therefore, every trader should learn how to minimize losses in their operations, which is the key to long-term trading success. Because trading without a stop loss will eventually be swept out of the market.
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