What is the golden stop-loss rule?
Updated
For trades such as stocks, futures, or forex, stop loss is a part of the trade, and it only works for investors if there is a stop loss in each transaction and it is adhered to. Today, I bring you a 3:1 gold stop loss rule, hoping to help with your investments.
Stop loss is a way to minimize losses in current market trades and is frequently mentioned. However, the essence of stop loss is not just setting a stop loss price. In particular, in markets such as forex and futures where long and short positions can be taken, too many stop losses will undoubtedly cause significant loss of capital. Market leaders use people's fear to cause repeated shocks, even unilateral rises or falls to trigger short-term traders' stop loss prices, and then quickly retract. The normal daily volatility of the stock market is also around 5%, so if your stop loss is set at 5%, won't it often be hit?
This requires attention to two issues: first, judging the trend of the market, whether it is a volatile market or a clear trend market; second, setting a reasonable stop loss position.
First of all, it's important to understand that the most notable characteristic of the trading market is volatility, and most of the time it's in a volatile trend, regardless of whether it's in a larger time frame or a shorter time frame. Therefore, the investment strategy for a volatile market should be the preferred strategy for short-term traders.
Secondly, identifying the range of volatility is crucial. Find the highest and lowest prices in recent price fluctuations. After a sharp rise or fall in the market, a corrective wave will form between these highest and lowest prices, sometimes lasting a long time. For example, commonly seen patterns such as triangle consolidation or box consolidation require a longer period of time before forming a new breakthrough. As for what prices to choose as the range, it depends on your trading period, whether it's daily, weekly, 60-minute, or even minute-by-minute. By using price analysis to determine the operational cycle, you will find a clear pattern of fluctuation range. The stop-loss price for such fluctuations should be set outside the highest or lowest points, and smaller stop-loss or trailing stop-loss should not be used.
When the price breaks through the highest point, it is necessary to observe its sustainability. In most cases, it will return to the range-bound area again. However, if the sustainability is strong, it continuously sets new highs, and trading volume continues to increase, a new trend can be determined, and the stop-loss can be changed to a trailing stop. Its price should be set at a price that falls more than one time period beyond the highest or lowest price, and there is no new high or low in three consecutive time periods. At this time, it can be judged that the trend has stopped and entered a range-bound market. For example, if the time period is a 5-minute candlestick chart, then the trailing stop should be set at a price formed by a relatively large 5-minute candlestick chart. But generally, it should not exceed two candlestick chart prices, because beyond this price, the profit left is often very small.
The 3:1 golden stop-loss rule in trading skills means that the profit of the take-profit point is three times the loss of the stop-loss point. For example, if you buy a stock and it falls by 7% or 8%, you should close your position in a timely manner. When your stock rises by 20% to 25%, you should consider selling some of it, and not be greedy and wait for it to rise further. Of course, the percentage values here can be changed according to the market situation, but the ratio should always be maintained at 3:1.
Some investors may have doubts, what if I set a stop loss at 8% and then the stock rises significantly, even by more than 50%, after I sell it? It seems like a big mistake to sell it, and many investors may no longer believe in the 3:1 rule. Actually, the reason why we set a stop loss at 8% is to prevent it from falling by 10%, 20%, 25%, 40% or even more. You can think of it as a small insurance premium to ensure that an 8% loss doesn't turn into a 60% loss. Isn't it easier to handle that way? For most investors, an 8% loss is manageable, but a 60% loss is a burden that many cannot afford.
In the market, human weaknesses will be reflected. When you hold a stock that falls, you will lose some capital, and you will fear that it will continue to fall, rather than hoping it will rebound to make up for previous losses. As a defensive measure, trading systems should still follow the 3:1 rule for stop losses. Finally, I wish everyone a happy investment journey.
Note
Let me introduce some scientific stop-loss methods. Our goal in entering the market is to make a profit, and stop-loss techniques are a method and means of safeguarding capital safety. In order to make money and profit, it is necessary to master the relevant methods and means. To avoid losses, the first thing is to learn scientific stop-loss methods.
(1) Trailing Stop Loss Method
The trailing stop loss is to always take the highest price as the investor's buying price, and when the stock falls to the set stop-loss range, it is time to sell. When a stock keeps rising, investors can gradually adjust the stop-loss price upward according to the magnitude of the stock's rise, that is, gradually raise the selling price. This has two advantages: first, it can reduce losses or lock in profits; second, it can dynamically control the operational thinking, so that risk control always becomes a safety valve to protect investment.
In fact, this kind of control is very necessary. It is an indispensable link to ensure that you make more and lose less in trend trading and to establish a personal operation system. If this adjustment can be combined with techniques such as moving averages and trend lines, it will be more flexible in bear market operations.
(2) Time Stop Loss Method
Here, the period mainly refers to the trading period. Before investing in a stock, the correct approach is to consider whether it is a short-term operation, medium-term trading, or long-term investment. Don't change from short-term to medium-term, medium-term to long-term, and long-term to shareholder. The correct approach for a trader should be to follow the trend and engage in waveband operations. In this process, time is a critical factor because time determines the efficiency of a speculator's use of funds.
(3) Proportional Stop Loss Method
The proportional stop loss method is the most common stop loss pattern we use, that is, setting a stop loss ratio, such as 10%, 8%, 5%, etc. Although this stop loss method is not particularly scientific, it is the simplest way to avoid greater losses. Whether to use this method depends mainly on market conditions. For example, in a bull market, you can expand this ratio according to the situation, and in a bear market, you can shrink this ratio. This stop loss method depends mainly on your understanding of individual stocks and trading strategies. In addition, proportional stop loss can also avoid the market's volatility damaging the investor's mentality, because when the mind is not clear, the best way is to exit and observe.
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Note
In trading, mindset is everything. Focusing solely on profit without considering one's emotions can lead to self-destructive behavior.Note
Short-term trading is about paying attention to the details, managing your mindset, and understanding that even small nuances can determine your success or failure, therefore, don't be complacent.Note
As traders, we all understand that the sooner we secure profits, the more at ease we feel. Therefore, selecting the right asset class can make short-term trading even more favorable.Note
The market is following the expected trend, stay tuned.Trade active
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