Foreign exchange stop-loss operation: How to make good use of the double-edged sword of stop-loss in foreign exchange trading?

When I first got involved in foreign exchange trading, I saw a flood of famous quotes about trading, including countless chicken soup quotes about stop-loss, such as these:

Investing mistakes are not terrible. The most important thing is to avoid continuous mistakes and stop losses in a timely manner.

Life is like the stock market. In the long course of life, one should also learn to stop losses.

If you don't love me anymore, I will immediately stop the loss and never be cheap.

When I first did foreign exchange trading, I was fed a lot of this "chicken soup", but later I found that this "chicken soup" was really useless. As the saying goes, to do a line, you must be good at it, read more books in a down-to-earth manner, have a solid knowledge system, and think about and summarize in actual combat. Only in this way can you continuously deepen your understanding of trading and continuously improve your trading level. It is a complete waste of time to read these famous quotes all day long.

When it comes to stop-loss, most of us were first introduced to foreign exchange trading with the concept of stop-loss, which then took root and became ingrained in our brains.

The essence of stop loss is to control risk and control your own loss amount, which is part of risk control. The mainstream concept in the trading industry absolutely advocates stop loss, which is beyond doubt.

However, I would like to raise two questions here to discuss and help you deepen your understanding of stop loss:

First, have you abused stop-loss?

I think many beginners will abuse stop-loss, which is caused by over-instilling the concept of stop-loss. Many beginners start trading with a string in their mind all the time: stop-loss. The same is true for me at the time. Because of the fear of losses expanding, beginners usually set the stop-loss distance very narrow, and as a result, the order was triggered by a little carelessness. Over time, a large number of loss orders formed in the account, which not only hit the confidence of the beginners, but also gave the beginners the illusion, "Why do I lose more and more with stop-loss? Does stop-loss make me lose money or make me make money?"

The problem is that you do not have a deep understanding of stop loss and abuse it.

As mentioned before, the essence of stop loss is to control risk, and stop loss is only one of the elements of risk control. Another more important thing is position control (position control), which is more important than stop loss. For risk control, position control is the first, followed by stop loss, and when setting stop loss, you also need to consider profitability. If you lose your profitability because of the simple purpose of stop loss, then you are abandoning the basics. Many novice accounts cause a lot of loss orders due to stop loss, and in the end they not only fail to make money but continue to lose money. This is the abuse of stop loss for the purpose of stop loss. You know, the ultimate purpose of trading is to make profits and make money, and you cannot make profits because of stop loss.

Many novices have had the experience of abusing stop losses in the process of actual combat, setting the stop loss too small, and some people also set the stop loss distance mechanically, for example, the stop loss distance of each order is set at 10 points, and the profit target is set at 30 points. This friend of the editor is like this. This guy also bragged to me plausibly: "My profit-to-loss ratio is 3:1, which means that even if my winning rate is only 40%, I make 10 orders, and the profit of 4 orders is 120 points, and the loss of 6 orders is 60 points, so I still make 60 points... Moreover, even if I make orders by mumbling, the probability of my mumbling is 50%!" But the final result! His winning rate is 15%, and he still loses money in the end... The truth is too stupid and naive! If trading is really such a simple math problem, how can more than 90% of people lose money!

Setting a stop loss mechanically is a very stupid practice, and anything that is rigid will be eliminated because it does not apply.

Following the above topic, the editor introduces the second question:

Second, how to set a stop loss?

The person asking this question is nothing more than trying to figure out "how to establish a stop loss level?" However, there is no answer to this question. If there is an answer, there are thousands of answers.

Every trader will develop their own unique trading mindset in the process of learning. Some people believe that stop losses should be set near some support and resistance levels, some people believe that very wide stops should be set, and some people believe that stop losses should only be set when a major event occurs in the market. Generally, it is a manual stop loss. Everyone's thinking is different, but this does not prevent traders from making money. Some of the traders I have contacted have true experts who do not set stop losses, but they will make some hedging orders. At the same time, the positions are controlled within a small range. The current profit effect is very ideal.

The sentence is still the same: what fits is the best! The editor believes that this is one of the most classic sayings in the trading world so far. In the process of actual trading, what you think and know is integrated. In the trading system or trading strategy, if there are conflicting elements, it will inevitably affect your entire trading performance, so everything must be suitable to be seamless! With the accumulation of experience and the deepening of cognition, you will naturally have your own set of stop-loss plans.

Therefore, the stop loss is a nunchakus. If you control it, it will be your weapon. If you can't control it, it will become a tool for self-harm!

Finally, there is another topic to discuss: manual stops and automatic stops.

What we discussed above are all automatic stop losses, even if the stop loss level is set on the software and then automatically executed by the computer. Since it is an automatic stop loss, you need to set the stop loss level, which is back to the previous question. There is no answer to this question.

Our software also has the function of trailing stop loss, which is a very good tool. However, how to set the distance of trailing stop loss has no answer, or there are thousands of answers.

In addition to automatic stops, we can also stop losses manually. The common names of manual stops are: "cutting positions" and "cutting meat", which means that traders manually close orders that lose money.

Automatic stop loss and manual stop loss have their own advantages and disadvantages. Automatic stop loss can make transactions more planned, which can avoid some emotional transactions, but the disadvantage is the lack of flexibility; while manual stop loss is the opposite, manual stop loss is more flexible, can be changed randomly, depending on market changes, but often in the execution, it is easy to be affected by emotions, reluctant to cut positions and cause losses to expand. So, stop loss, really easier said than done!