Regarding the importance of stop-loss, professionals often use the crocodile principle to illustrate. The original meaning of the crocodile principle is: suppose a crocodile bites your foot, if you try to use your hands to break free, the crocodile will bite both your foot and hand. The more you struggle, the more you get bitten. Of course, another possibility is that you kill the crocodile. In the financial market, whoever has more capital is the crocodile. If the readers are all small retail investors, please think more about the following text.

If a crocodile bites your foot, your only chance is to sacrifice one foot. In the speculative market, the crocodile principle is: when you find that your trade deviates from the market direction, you must immediately stop-loss without any delay or hope for luck. It sounds too cruel to say that crocodiles eat people, but the speculative market is indeed a cruel place where people are swallowed every day.

Let’s look at a simple set of numbers: When your capital decreases from 100,000 to 90,000, the loss rate is 1÷10=10%. To recover from 90,000 back to 100,000, the required profit rate is only 1÷9=11.1%. If your capital decreases from 100,000 to 50,000, the loss rate is 50%, and the profit rate required to recover will be 100%. This is the importance of timely stop-loss.

The reason for stop-loss

The significance of stop-loss is to ensure that you can survive in the market for a long time. Some even say: stop-loss = rebirth. The need for stop-loss mainly arises from subjective strategy errors, as every investor must admit that they may make mistakes at any time. This is a very important concept. The game among thousands of people makes it impossible to have any fixed rules at any time; the only constant in the market is change. Additionally, there are changes in objective conditions, unexpected positive or negative news, significant macro policy changes, wars, political unrest, terrorist events, natural disasters like earthquakes and floods, etc. Therefore, when facing a failed trade, you must decisively stop-loss.

Why is stop-loss difficult to execute

Understanding the importance of stop-loss is indeed important, but in practice, there are many examples of investors setting stop-losses but not executing them. In every trade, we cannot determine whether we are in a correct or incorrect state. Even if we make a profit, it is difficult to decide whether to exit immediately or hold on and wait, not to mention being in a trapped state. Human nature's instinct for greed makes every investor reluctant to win a few points less and even more unwilling to lose a few points more.

The first reason is the influence of luck. Some investors clearly know that their trend judgment is wrong but still want to wait and see. This hesitation leads to increased losses and missing the best stop-loss opportunity.

Frequent price fluctuations can cause some investors who often use stop-loss to waver. They often think that if they hadn’t set a stop-loss, this trade wouldn’t have resulted in a loss, which creates uncertainty about whether to set a stop-loss in the next trade.

Executing a stop-loss is a painful task and a challenge to the weaknesses of human nature.

Currently, a significant proportion of investors in the market live in a state of repression and anxiety, unable to forget their large historical losses, constantly wanting to recover, not realizing that this mindset is pushing them towards greater losses. Regardless of whether there are losses, always remember this phrase: always stand at zero.

If you understand and adhere to the concept of 'always standing at zero', then taking profits can actually be seen as a form of stop-loss. As the saying goes: 'Those who can buy are apprentices, while those who can sell are masters.' Here, selling includes both stop-loss and taking profits. In the real market, we often see some investors skillfully mastering the technique of cutting losses, proudly claiming to have escaped being trapped, yet they are not good at taking profits, often riding the elevator or roller coaster, or panicking as soon as the cart is lifted, then watching the cart go further up the mountain while they pound their chests and curse themselves.

Theoretically, the best method for stop-loss is not needing one, which means increasing the correctness and accuracy of operational decisions.

Investors are advised to preset a stop-loss point or stop-loss plan for each transaction before buying, treating this work as a necessary decision-making process or operational discipline. When you set a stop-loss point in advance, you will be calmer and less impatient, thus reducing the occurrence of erroneous decisions. Strictly speaking, stop-loss actually belongs to the content of capital management, and a clear and complete capital management plan is a higher level than a standalone stop-loss.

Message:

Real investment is a long-term process, in which victory and defeat always coexist and accompany each other.

Mindset is as important as technique; a wrong mindset will only interfere with operational thinking. A good mindset is a necessary condition for success.

The weekend has little fluctuation, Da Yu shares a bit of useful information, wishing everyone a successful journey ✊$BTC