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2024/09
A Few Futures Stop-Loss Rules That Will Benefit You for Life !
In the futures market, the quickest way for amateur traders to go bankrupt is to “cash out when profitable and hold on when losing.” In contrast, the secret weapon that professional traders use to grow steadily is: “Cut your losses and let your profits run!”
“Stop-loss” is a crucial aspect of the trading process. If we were to compare stop-loss to something, it would be like the brakes on a car. No one would dare drive a car without brakes, yet only a few know how to use the stop-loss “brake” effectively in the futures market. I will share my “Jia’s Multi-Dimensional Stop-Loss Rules” for your reference.
For stock investors, “stop-loss” often sounds unpleasant and unappealing. If you also despise this term, you’re laying a ticking time bomb in your investment career, bound to ruin it sooner or later. For a professional investor, stop-loss is a crucial part of the trading process, devoid of any emotional connotation. It’s just a planned step, executed as naturally as playing a video game, where you perform tasks according to pre-designed procedures, even if it means “sacrificing an arm.”
Because of inherent human weaknesses, our actions are often influenced unconsciously, and a single major loss can wipe out the profits of the previous 99 trades. Therefore, strictly adhering to the stop-loss discipline is the only way to survive in a risky market. Stop-loss is a fundamental skill for securities investment. There’s a useful and simple trading principle in American investment circles called the “Crocodile Rule.” This rule originates from the way crocodiles devour their prey: the more the prey struggles, the more the crocodile gains. If a crocodile bites your foot, it will wait for you to struggle, and if you try to free your foot with your hand, it will bite both. The more you struggle, the deeper you get trapped. Therefore, if a crocodile bites your foot, remember: your only chance of survival is to sacrifice that foot! In market terms, this principle means: when you realize you’ve made a mistake, exit immediately! Don’t make excuses, hope, or wait for another reason – just get out!
Whether it’s the stock market, futures, or options trading, this principle remains the same. Surviving in the securities market sometimes requires patience and confidence, but patience and confidence don’t mean taking unnecessary risks. Investors who don’t understand stop-loss are often those who lose due to wishful thinking. I emphasize that stop-loss must be scientific, and understanding scientific stop-loss is fundamental to winning in the stock market. The goal of scientific stop-loss can be summarized as: avoiding risk, protecting capital, and ensuring survival.
Stop-loss isn’t a direct investment loss; it’s actually an insurance premium paid to the market to protect your capital. It’s a cost you must bear when investing in the stock market. Just like when you buy a car, you need to get insurance, and you pay the premium every year. If you pay $5,000 in insurance and nothing happens to your car for a year, you wouldn’t regret it, would you? Controlling risk is the most crucial safeguard in achieving your goals. A novice driver who knows how to use the brakes is more reassuring than someone who only knows how to step on the accelerator; similarly, a beginner skier who can control their speed is more likely to become an expert.
Many traders are already in dire straits due to poor stop-loss habits. The futures market is a risky market, and it’s common knowledge that “one win, two break even, seven losses” is the typical situation worldwide, regardless of a bear or bull market. “Greed and fear” haunt every futures trader, and learning to control risk is the first lesson for every professional investor.
As a professional investor, every operation requires a plan. Before every purchase, you need to set three prices: the entry price, the take-profit price, and the stop-loss price. If this task isn’t done well, trading is prohibited! After experiencing both great successes and devastating losses, I’ve realized that mastering stop-loss is the foundation for survival and development in the futures market.
In response to the strong demand from fellow traders, I’m sharing my “Jia’s Multi-Dimensional Stop-Loss Rules”:
1. Spatial Displacement Stop-Loss Method
- Initial Stop-Loss Method: Set a pre-defined stop-loss point before entering a trade, such as 3% or 5% below the entry price (up to a maximum of 10% for mid-term trades). If the price breaks below this stop-loss point, exit immediately.
- Break-Even Stop-Loss Method: Once the price rises, adjust the initial stop-loss point to the break-even level (entry price + transaction costs). This method is very effective for T+0 operations and works well for T+1 too.
- Dynamic Stop-Loss Method: As the price continues to rise, keep moving up the stop-loss point and observe the price-volume relationship. If the relationship remains normal, maintain a stop-loss at a certain percentage below; if it diverges, exit immediately.
- Trend Stop-Loss Method: Use an effective trend line or moving average as a reference. Exit immediately if the price breaks below this line.
2. Time Cycle Stop-Loss Method
Before buying, set a holding time frame (e.g., 1 day, 3 days, 1 week). If the price doesn’t reach the expected level within this period, exit immediately to avoid turning a short-term trade into a long-term hold.
3. Emotional Fluctuation Stop-Loss Method
If you feel uneasy after buying, exit the trade, as this suggests a lack of conviction or confidence.
4. Emergency Event Stop-Loss Method
If a major event occurs that invalidates your reasons for buying, exit immediately to avoid further losses.
5. Judging the Main Force Stop-Loss Method
Monitor the main capital flow and positions. If you can’t judge it from the market, use a third-party website for real-time data.
By combining space, time, emotions, and unexpected events, I have developed this “Jia’s Multi-Dimensional Stop-Loss Method.”
The ultimate goal of the stop-loss strategy is to minimize risk while enhancing profitability. Remember, the highest goal in learning and using stop-loss rules is – to no longer need to stop-loss at all!
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