The defensive mode or stop-loss mechanism of Warren Buffet’s investment system, in broad terms, is based on investing in companies with a wide margin of safety. Investing with a large margin gives you the advantage of entering a company at a price point where its stock can’t drop much further, or if it does, it won’t be by much.

Then, it’s just a matter of sitting and waiting.

Of course, the challenge lies in selecting those companies with a sufficient margin of safety, as well as choosing the right time to enter them.

However, when you start in "this" trading business, you tend to avoid stop-losses.

_"If you wait long enough, prices will always recover." This is the rumor that circulates in the market. But all you need to do is read the comments to see how many people are trapped, waiting for prices to recover for years, all because they didn’t use a margin of safety in their investments.

That’s the downside of following advice without verifying that the saying "You never lose in the long run" doesn’t always hold true.

With this mindset, thousands of traders switch to forex, commodities, cryptocurrencies..., using futures, CFDs... with the idea of day trading and living off the trade.

But what usually happens? They enter the market, often with high leverage, and their account "disappears" in minutes.

Money management: NONE.

They keep trading without a stop-loss, clinging to that old belief that in the long term you never lose. But there are plenty of day traders who turn into long-term investors simply because they can’t accept their losses.

If you don’t use a stop, psychological factors will prevent you from closing a losing position. The EGO doesn’t like losing. It's true, anyone can experience this while trading.

You always let losses run, hoping to recover. And the thing is, this often works out, reinforcing the idea of not using stop-losses, but with just one trade where prices don’t recover, you can kiss all the money in your account goodbye.

Why? Because not only do you let the losses run, but you also add more positions, thinking it’s dropped enough and won’t go any lower. That way, if it rises, you’ll recover the money sooner. But the price keeps falling, and the losses multiply until you hit a Margin Call.

As I said, it’s a shame, because we could avoid most losses and always come out on top, if it weren’t for that one trade that ruins our entire strategy.

Therefore, placing a stop is absolutely necessary, period. One, to calm our psychological fears, and two, to avoid wiping out all our money.

Not using a stop in each and every trade leads to the following SIDE EFFECTS:

- Total account wipeout: Margin Call.

- Unable to trade further because you’ve run out of money.

- Much longer than desired time without being able to trade, waiting for losses to recover. No liquidity.

- If you don’t close the losses, you can’t open a new position at a more favorable point, recover those small initial losses, and exit with a profit.

On the other hand, PSYCHOLOGICALLY, the impact can be disastrous:

- Nervousness – "What do I do now if I don’t recover the lost money?"

- Low self-esteem – "I’m not cut out for this, I’m a failure…"

- Bad mood – "Lashing out at everything around you, snapping at family."

- Feeling of helplessness – "There’s no way to fix this unless I recover my losses."

- Physical symptoms – "Headaches, stomach pain, nausea, sweating, lack of focus…"

- Desperation/fear – "How do I get more money to average down or recover my losses?"

- Isolation – "Staring at the screen, ignoring everyone, monitoring your position every second, hoping for recovery."

- Insomnia – "Checking prices in the middle of the night on your phone. Sleepless, thinking about what you’re losing."

- Regret – "If the price goes back to where I entered, I swear I’ll never trade again without a stop."

All of the above escalates to incredible levels, proportional to the amount of money “at stake.”

So, is it worth placing a stop-loss in every single trade or not?

#tradingStrategy