Foreign exchange investors should keep their stops in perspective

In investment and speculation, the stop-loss viewpoint is recognized as a necessary effort and principle. Trading without a stop-loss is a dangerous trade. In leveraged trading, it is almost related to the life and death of the invested capital. Many people who liquidate their positions do not lack analytical trading skills, but ultimately fail. The same is true in real trading. Looking at the other party's direction, buying in the right direction, and ultimately not making money or even losing money are not few. Where is the problem? Stop-loss! It can be said that "success also stops loss, failure also stops loss"...

The two most common types of stop-loss phenomena are: all trades do not have stop-losses, and dozens of successful trades are ruined by one failed trade. Continuous success makes the trader's sense of achievement continue to expand, the risk awareness gradually fades, the position is getting larger and larger, and he is more and more confident in his own judgment. But often at this time, danger is quietly approaching him. Trading is impossible to be 100% successful. Dozens of successes accumulate time for future failures. This is not based on human will, but on probability. "People walk by the river, and they can't get their shoes wet." This is the truth. Once a failed trade comes, traders are unaware of it, thinking that there is no problem with their judgment. The reverse development of the market is a temporary phenomenon, and it will turn back sooner or later, but the result is often ended in huge losses, or even lost all their hard-earned money.

Another phenomenon is that all trades have a stop loss, but the stop loss is often knocked out. After the stop loss is triggered, the market turns in a direction that is favorable to their original position. Traders often fall into the vicious circle of "opening a position - stopping a loss - re-opening a position - re-stopping a loss". At this time, all analysis and forecasting are irrelevant, because the stop loss has become a trader's nightmare.

There is no need to comment on the former phenomenon. After suffering losses, you will naturally have a deep understanding of stop losses, and you will no longer need to be instilled by others. You may consciously stop losses yourself.

The latter phenomenon is quite intriguing, and it is also the topic I want to discuss with you here. Let me give an example: if you buy life insurance, is the insurance premium charged by the insurance company the same? The same 1 million life insurance amount, the insurance premiums of different age groups must be different. The insurance premium for newborns is higher than that for children. From children to the prime of life, the insurance premium increases in a nearly straight line from low to high, but the slope is not too large. In old age, the insurance premium will increase rapidly in a curved manner.

Why is this so? Because the mortality rate is different for different age groups, this is the root cause. The mortality rate of newborns is greater than that of children, so although the age is young, the insurance premium will be higher than that of children, and the mortality rate of young adults and newborns is lower, so although they are older than newborns, the insurance premium is lower than that of newborns. In old age, the mortality rate jumps, and the insurance premium will naturally increase by leaps and bounds. I believe that if you insure a 120-year-old, the insurance premium will probably account for 80% of the insurance amount.

Insurance companies set their rates not by age, but by mortality, that is, by the payout ratio. What is the payout ratio? It is the probability of a payout occurring. Please note that the key concept of probability is introduced here.

What is a stop loss? It is to insure one's trading behavior and obtain theoretically relatively cost-effective profits with limited losses. The size setting of the stop loss is like the setting of the rate, and probabilities must be introduced.

Under the premise of probability, it is not difficult to understand why a 10-point stop loss is not necessarily safer than an 80-point stop loss. 10-point losses seem small, but the probability of occurrence is too large, almost 90%. Excuse me, who dares to pat their chest and say, "The probability of my 10-point stop loss triggering is only 50%!" If there is such a warrior, I am willing to bet again and again. An 80-point loss seems large, but the probability of occurrence is only 10%. Calculate, which one is cost-effective?