I think this is a very good question, and it is also a topic that I particularly want to make a special topic for members recently. Whether to buy more when the price drops or resolutely stop loss depends essentially on your values and cognitive level.
Let's first look at what investment and speculation are: In the market, there are two types of people, one is value investing, and the other is speculating. There is no good or bad difference between the two. The previous article on contracts also mentioned in detail that the original intention of the invention of futures contracts was to hedge for those who produce spot goods (short/sellers) or those who need spot goods in the future (long/buyers). However, if everyone comes to hedge, it is very likely that you will not be able to find a counterparty that can match it in this market, and no transactions can be made. At this time, speculators began to appear. Speculators acted as the counterparties of these serious hedgers, providing liquidity, and buying and selling completed the pricing of the futures market. Hedges complete the transfer of risks through speculators, and speculators obtain an expectation of possible future profits by accepting risks. In the long run, value investors make money from these speculators.
Theoretically, we should undoubtedly stand on the side of investment, so why do so many people choose to speculate? The main reason is that there is always a myth of getting rich quickly in this market. No one can really resist the temptation of getting rich overnight, and the threshold for speculation is low. As long as you know how to buy and sell and look at the price, you can participate in it. Therefore, there will always be people who participate in speculation. After the leeks are cut, they will grow again in the next season, and they will continue to grow. Moreover, existence is reasonable. If there are no speculators to provide liquidity, and the market is full of value investors who buy for several years without moving, then this market will also be lifeless. There will be fluctuations only when there are speculations, and there will be more people speculating only when there are fluctuations.
Let's go back to the question itself: Buying more when the price drops can be said to be a standard operation of value investors, and stop loss is a standard operation of short-term speculators. I even think that value investment and stop loss are contradictory concepts. If a thing is truly valuable, how can we talk about stop loss. Just like an Apple mobile phone sold for 8,000 yuan in the market, and now it is discounted to only 4,000 yuan. The machine is still the same machine and has not changed. Shouldn't you buy more and be more excited? Why talk about stop loss? Because you deeply know that as soon as this discount event is over, the market will immediately return to 8,000 yuan. This is because you understand the true value of what you buy, and the underlying assets in the investment market often do not have a very standard pricing system, so most people cannot make direct judgments like looking at Apple phones. As a result, you spent 20,000 to buy something worth 8,000 yuan, and called it value investment. I think this is the time to stop loss, and you should not stop at any other time.
This brings up another question about value investing: when to buy? In my opinion, there are two buying points for value investing. The first is after the crash; this is what Buffett said about others being fearful and I being greedy in practice, but this opportunity is not always available. The second is at any time. In fact, you heard it right. Really good things and good assets can take you through cycles, just like buying Bitcoin in 2017, followed by the 94 crash. Looking back now, can you say that I bought it wrong?
As for the stop-loss trap, one of the deadly points of short-term trading, I have already written it very clearly in my previous article, so I will quote it directly without further elaboration. We can clearly see that especially in the cryptocurrency circle, in the recent market, if you are a short-term copycat with a stop-loss or a contract, you will be pressed to the ground and rubbed repeatedly with an 8% or 10% stop-loss, and there is no possibility of survival. There is a 90% chance that you are not on the bus when the real big market comes, and when you get on the bus, you are on the road of stop-loss, anyway, there will be no peace.
Trap ④: Profit-loss ratio stop loss trap
One of the topics that cannot be avoided when participating in short-term trading is the issue of stop loss. How to set your own stop loss? This involves a profit-loss ratio trap that most people find difficult to realize, that is, as long as you have an actual loss, you must have a higher profit ratio to break even, and the more you lose, the higher the ratio you need to break even. For example, if you lose 10%, you only need to make a profit of 11.1% on your next trade; if you lose 20%, you only need to make a profit of 25% to break even; if you lose 50%, you need to double your remaining principal to break even, and if you lose 90%, you need to * 10 times the current price to break even.
This conclusion reflects that the profit and loss ratio of our short-term entry point must be several times higher than the break-even ratio, so that it makes sense to operate in the long run. For example, if your stop loss line is 10%, your take profit point should be at least 20%; if your stop loss line is 20%, then your take profit point should be at least 50%; if your stop loss line is 50%, then your take profit should be at least 200%. Only in this way can you make a profit in the long run.
However, there are contradictions. The volatility of the cryptocurrency market is so great that a stop loss of 10 or 20 points can easily hit you. You are basically in an infinite cycle of frequent stop losses. But if you set the stop loss too high, it will be difficult to reach your take-profit position in the short term, which goes against the original intention of your short-term trading.
Another contradiction is that once you incur losses, the resistance you face to get out of the situation will be greater. This leads to short-term traders like you in the market looking for such high profit and loss opportunities. But please ask yourself, do such opportunities exist at all times? If everyone knows that such opportunities exist, will there be smarter speculators who take profits and losses in advance and get ahead of you? When everyone is getting ahead, do such profit and loss opportunities still exist?
We know that finance is a cross-time value exchange. We can simply write our income into a formula: S=f*(1+p*q)^t
Where f represents the frequency of transactions, p represents the winning rate of transactions, q represents the odds or rate of return, and t represents time (assuming that the returns are all positive)
We can clearly see the difference between the two. Long-term investors (f=1) sacrifice time, average rate of return q and frequency f to obtain an exponential growth model with a high winning rate p, while short-term investors (t=0) sacrifice a certain winning rate p and rate of return q to obtain time compensation, and obtain a power growth model by increasing the frequency f. So this is why few people in the pie circle have heard of people who have suffered losses in the long term. This trick not only has a high winning rate, but also has amazing explosive power in the later stage, and most of the time it only bears floating losses, while short-term operations face real losses.
But I am not saying that value investing is definitely better than short-term speculation. What I want to express is that these are two completely different games, and in a sense, they are not comparable. Buying more as the price drops also has its application scenarios, that is, you must have studied the assets you bought in depth, its long-term value, and it is just short-term panic and the fundamentals have not changed. Don't jump into the pit of value investing without doing your own research, otherwise you will also die miserably. Why do I often say that the currency circle is the simplest investment in all investment markets? It is because the fundamentals of BTC have never changed. As long as it does not change, it can maintain a spiral upward trend, and it must conform to mean reversion. Mean reversion means that if it falls too much, it will definitely rise, and if it rises too much, it will definitely fall. Bitcoin will always be that Bitcoin. You don't need to study its financial report revenue. It has no team or office. Executives will not illegally reduce their holdings. The founder will not run away with his mistress, and there is no financial fraud. As long as the world keeps printing money, it can rise as plainly as it can.
I think stop loss should not be the topic of our research. In other words, when you realize that short-term investment has no future, you should completely remove the term stop loss from your mind and replace it with diversified investment and position management. This is another seemingly unscrupulous point of view. How can you invest without stop loss? What if you lose everything? What if you jump off a building? That's right, today I just want to completely smash your brains and put some really useful things in.
The advantage of value investing is that once the judgment is correct, you can get a lot of returns through the compounding of time, but the disadvantage is also obvious, that is, if the judgment is wrong, the loss will continue to magnify through the compounding effect. It is inevitable that profits and losses come from the same source, so how can we avoid going bankrupt due to misjudgment? Only by serious research and appropriate investment, why do you have to use spare money to invest? Because although the winning rate is high, there is still a risk of losing everything. You can't take all your money to bet that it will never happen. If you have studied it carefully, invested it, and spent time growing with it, but still failed in the end, then this is fate, but it doesn't matter, because we are divided into warehouses, there is still a chance! Continue to study and improve your cognition. When you get closer and closer to the "Tao", the world will reward you sooner or later.
How can you stop loss on something that you have been polishing and researching and think is fine, something that you think is valuable? You can only consider taking profits. Unless there is a fundamental change in a short period of time, it is impossible to stop loss, even if it returns to zero. If your cognition is to return to zero, then returning to zero is your fate. It is that simple. There is really nothing to complain about. This world does not allow ignorant people to make money. This is even more true in the currency circle. Cognition determines your lower limit, and opportunities determine your upper limit. For example, you choose a coin that you think is really good, but the market outlet is never there, and we are powerless to do anything about it; but cognition determines whether you can seize the opportunity. For example, if the outlet is really here, a coin could have risen 100 times, but the upper limit of your cognitive understanding is 10 times, which means that you are destined not to get 100 times. In general, cognition determines a person's outcome.
A qualified investor uses cognition to replace stop loss. Have you ever seen Buffett liquidate his position and leave the market? Yes, but it is a rare event. Just remember one thing, things of real value cannot be sold at a low price for a long time, and will definitely return to the mean, just like Apple phones cannot always have half-price promotions. So if you can read the whole article, you should have realized it. In the future, don’t ask me if I should sell my stocks after buying a certain garbage coin and getting 80% stuck. I really don’t know. I also make predictions, but I rarely participate in short-term or swing trading. Although my predictions are correct most of the time, I don’t want to gamble. I only know that when autumn comes, I should harvest, and if it doesn’t come, I will continue to farm silently.
