The trading market is an alchemical forge where skilled traders gather. Facing a market that is unpredictable and could reverse trends at any moment, if you are an aggressive novice trader, there is a high likelihood that you could lose all your capital. However, for experienced traders, they set precise stop-loss positions based on the maximum loss they can tolerate, thereby effectively avoiding market risks. This is one of the important reasons why trading experts remain invincible in the market.
I. The Three Difficult Truths About Stop-Loss in Trading
Although many traders have the concept of "stop-loss" deeply ingrained in their minds, they may find it difficult to implement it in practice due to immature stop-loss methods, or even setting a stop-loss without strictly enforcing it, leading to being eliminated from the market. Why is stop-loss so difficult in trading? The main reasons are as follows:
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1. The mentality of taking chances: Sometimes traders may sense that the trend has ended, but they still hold on to the mentality of taking a chance, wanting to wait and see, which results in missing the best opportunity to stop loss.
2. Frequent price fluctuations are unpredictable, and frequent incorrect stop-losses can undermine the confidence of traders, leading to a state of self-doubt, which in turn shakes the determination to stop loss next time, and then leads to the belief that stop-loss is not important.
3. Executing a stop-loss is a process that tests human weaknesses. During trading, traders are influenced by greed or fear, which causes them to waver in their trades, leading to a loss of rationality or not adhering to their own trading rules.
II. Stop-Loss Techniques That Trading Experts Never Reveal
A Wall Street saying goes: The trading market will try every means to negate the choices that most people think are correct. Therefore, an appropriate stop-loss point is a protective shield for capital preservation in trading! Whether traders can withstand various market tests and make profits depends entirely on their correct understanding of stop-loss and the proficiency in stop-loss technical operations. The following will focus on several stop-loss techniques of trading experts:
1. Set stop-loss based on support and resistance levelsThe usual stop-loss positions are set below the support levels and above the resistance levels. Therefore, accurate judgment of support and resistance levels is a necessary prerequisite for setting effective stop-loss positions.
For example, the following chart is a trend chart of AUD/USD. In the most recent support area, the stop-loss point is set below the support level, and some people may even set the three red lines or more in the chart as stop-loss points.
In a long trade, if the stop-loss point corresponding to the last line is chosen, the trade will not trigger the stop-loss point, and it will wait for the trend to rebound and then go short, without affecting the profit and loss.
If the stop-loss point corresponding to the second line is chosen, the trade will trigger the stop-loss point and automatically close the position before the rebound begins, at which point the trader is buying high and selling low, in a loss state. Compared to choosing the first line of closure, the loss will be relatively less.
If the stop-loss point corresponding to the third line is chosen, looking at the current candlestick chart, it will not trigger the stop-loss, but imagine if the market price breaks through the support level, is the stop-loss point closer to the lowest position of the support level the better, with relatively less loss.
2. Setting stop-loss through market volatility
Setting stop-loss through market volatility is mainly to prevent leaving the market too early within the normal fluctuation range of the market. Determine the market's fluctuation range and trend, and set the stop-loss outside the fluctuation range to give yourself enough trading space.
First move: You can use the Bollinger Bands indicator, which reflects the market price fluctuation through the channel composed of the upper and lower bands of the Bollinger Bands. The larger the channel, the greater the market fluctuation.
As shown in the figure, it is the Bollinger Bands indicator of the AUD/USD daily chart. The market's fluctuation range is increasing. If you choose to go long, you can set a stop-loss outside the amplitude, as shown in the red line position in the figure.Second Move: You can use the ATR indicator to measure market volatility, thereby setting a stop loss. ATR, which stands for Average True Range, is an oscillatory indicator that can be added and used in the MT4 software.
The larger the ATR, the greater the market volatility. If you do not want to exit the market too early, the stop loss should be set further away from the entry price. When the market is more stable, the stop loss should be closer to the entry price to respond to market volatility in a timely manner.
From the ATR indicator on the AUD/USD daily chart, it can be seen that in the recent period, the market has been relatively stable, so the stop loss can be set closer to the entry price, smaller than this fluctuation range, for example, it can be set 30 points away from the entry price.
Summary
Setting a stop loss in trading is one of the principles that traders must adhere to. At the same time, the discipline of the stop loss strategy is also a test for traders. It is essential to avoid the influence of subjective emotions and adopt a rule-based stop loss trading method. This is a process that requires traders to cultivate, pursue, and comprehend over a long period of time.
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