Taking profit and stop loss are among the most crucial components of any trading system. Last week, I elaborated on five technical methods for taking profit, and many friends expressed that they gained a lot from it.

This week, I will continue to explain six methods for setting stop losses, including some that I find most effective and some that are quite popular in the market, such as trailing stop losses. After reading this article, you will have a deep understanding of stop loss methods.

I suggest that you can read it in conjunction with the article on taking profit, and choose the stop loss method that performs best in terms of profit and that you can consistently implement according to your trading strategy.

You can bookmark it first, then read it. If you find it helpful, you can give a like at the bottom of the article. Thank you.

1. Six Methods for Setting Stop Losses

A stop loss refers to the act of closing a position in a timely manner when the loss on our order reaches a predetermined value to prevent greater losses.

In a complete trading system, a stop loss is absolutely necessary; a trading strategy without a stop loss will inevitably end in a loss.

Stop losses are divided into static and dynamic.

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Static stop loss means that after entering an order, the stop loss is set at a fixed stop loss space or with a constant stop loss amount. Once the market trend turns unfavorable and reaches the set position, the position is closed. For example, after entering an order, a stop loss of 100 points is set, and the position is closed when the 100 points are reached.

Dynamic stop loss means that the criteria for a stop loss in the trading system are dynamic. When we hold a position, the market is constantly fluctuating, and there is no fixed point for when to stop the loss. We need to observe the dynamic changes in the market until a trend that meets the stop loss criteria appears, and then we manually stop the loss. For example, when holding a long position, the stop loss criterion is the formation of a bearish reverse break structure in the market, at which point we manually execute the stop loss.Method 1: Fixed stop-loss space or fixed stop-loss amount.

This is a relatively simple static method of setting a stop-loss.

After entering an order, a fixed stop-loss space is set, for example, after entering a day trading order, a fixed 30-point stop-loss is set. Or a fixed amount stop-loss is set, such as stopping out when the order loss reaches 1% of the principal.

In the stock market, some traders also use a fixed percentage of the market pullback for stop-loss, for example, stopping out when the stock falls by 5%.

When the market breaks through the downtrend line and the previous turning point, and the trend reversal is confirmed at the time of breaking through the turning point, a long position is opened, and a fixed 30-point stop-loss is set (the position of the blue ellipse in the figure), after a simple consolidation, the market rises significantly.

In this stop-loss method, the stop-loss space should be formulated according to the specific volatility of different varieties.

Method 2: High-low point stop-loss.

High-low point stop-loss is the most common technical standard for stop-loss and is also a static method of setting a stop-loss.

The market always operates in the form of waves, which will show continuous rising or falling pullback high-low points, these high-low points are also called turning points, and in practice, the starting point of the wave or the turning point of the pullback is used as the stop-loss point.

After the market bottom forms a break, there are two ways to use high-low point stop-loss when opening a position: one is to place it at the turning point, and the other is to place it at the starting point of the wave.Pivot point stop loss, with a small stop loss space, good profit-to-loss ratio, but low error tolerance, more aggressive.

Breakout point stop loss, with a larger stop loss space, a worse profit-to-loss ratio, but higher error tolerance, more conservative.

This method of stop loss is also quite flexible, and the stop loss space will be adjusted with the change of fluctuation.

Method 3: Combine with technical position stop loss.

Combining with technical position stop loss refers to using key positions of technical indicators in actual combat, and stop loss is triggered when the market breaks these technical positions. For example, important support and resistance levels, or moving average technical positions, etc.

After a decline, the market continuously tests the support near 7360 without breaking, forming a bottom consolidation. The market tests downward for the third time, reaching 7400, and forms a reversal candlestick to go long, setting the stop loss below the previous low support at 7342, and then the market rises.

Method 4: Trend reversal pattern stop loss.

This is a dynamic stop loss method. After the order is entered, the market forms a structure or pattern in the opposite direction, which can be understood as the trend has reversed, and the order is stopped.

At the position of the red circle on the left, the market formed a top consolidation break, and entered to go short. After the short position was entered, the market simply ran down and then reversed upward. At the position of the blue circle in the chart, an upward 123 break was formed, confirming the trend reversal, and the order was stopped.

In actual combat, everyone can combine their most commonly used criteria for confirming reversals, using moving average crossovers, or breaks in trend lines and channel lines, as long as the criteria are consistent.Method 5: Batch Stop-Loss.

In a single order, set multiple stop-loss criteria and stop-loss in batches proportionally at different stop-loss points.

After the market forms a head and shoulders pattern at the bottom and breaks through, enter a long position, setting two stop-loss points at the pivot point 21312 and the lowest point 21255.

After the order enters, the market makes a deep correction, triggering the first batch of stop-loss at 21312. After the market consolidates and reverses upward, the second batch of stop-loss at 21255 is not triggered, and the remaining position is profitably closed.

This is a compromise stop-loss method. By setting different stop-loss points with different stop-loss criteria, the risk of stop-loss is diversified.

In practice, it is often encountered that after an order is stopped, the market reverses and goes out of the original trend. At this time, since the order has been stopped, it is very disadvantageous.

The operation of batch stop-loss can retain a part of the position when encountering this situation, and continue to make a profit after the market goes out of the direction again.

Method 6: Trailing Stop-Loss.

Trailing stop-loss refers to the situation after the order enters, the market develops in a favorable direction, leaves the entry point, and gradually generates profits. The stop-loss is adjusted from the original stop-loss point to a more favorable direction, and the stop-loss is adjusted step by step as the market gradually develops.

Trailing stop-loss is a bit like the left and right feet when climbing stairs. When your right foot goes up the step, your left foot will follow. For every certain increase in profit, the stop-loss will also follow up.The Shanghai Gold 2304 contract, after consolidating at the bottom and breaking through, was opened for a long position at a price of 414.6, with a stop loss set at the inflection point below.

First trailing stop loss: As the market developed upwards, when the price reached point 1 and rose to 415.6 (an increase of 1 yuan), the original stop loss was adjusted to the opening price.

Second trailing stop loss: The market continued to rise, and when the price reached point 2, it increased to 416.6 (an increase of 2 yuan), and the stop loss was adjusted to point 1.

Third trailing stop loss: The market continued to rise, and when the price reached point 3, it increased to 417.6 (an increase of 3 yuan), and the stop loss was adjusted to point 2.

Fourth trailing stop loss: The market continued to rise, and when the price reached point 4, it increased to 4186 (an increase of 4 yuan), and the stop loss was adjusted to point 3.

And so on, for every 1 yuan increase in price, the stop loss is adjusted once.

The primary purpose of the moving stop loss is to break even, so most of the time, the first step in moving the stop loss is to move it to the cost price.

In this way, even in the worst-case scenario, the order will exit at break even, without incurring a loss. After setting a trailing stop loss, the order will not incur a loss and may have already locked in profits, which reduces the psychological pressure of holding a position and is conducive to the execution of trades.

These six stop loss methods can be chosen according to one's trading strategy. Next, I will discuss some common issues encountered with stop losses.Question 1: Is it okay not to set a stop loss?

Absolutely not.

As we discussed earlier, setting a stop loss is to control the risk in trading to prevent greater losses. Not setting a stop loss means that the risk in your trading is infinitely magnified. If your profits are not sufficient, your losses can easily exceed your gains, so not setting a stop loss is not an option.

Question 2: I've gone a long time without setting a stop loss and haven't encountered any issues, why is that?

Some people happen to encounter a volatile market and find that they can hold on to their positions without setting a stop loss and still end up in profit, not understanding the significance of a stop loss.

If you have conducted enough backtesting or simulated trading, or if you have more than a year of practical experience, you will find that the consequence of not setting a stop loss is a margin call, because the market will not always be volatile, and your funds are not infinite. You cannot withstand large fluctuations indefinitely.

We set stop losses to control losses in extreme market conditions to avoid irreversible major losses. Especially in leveraged markets like futures or forex, a margin call is inevitable when encountering extreme conditions.

A single margin call could wipe out profits from three to five months. It's like buying car insurance; it's not for the sake of having an accident, but to alleviate great pressure when an accident occurs.

Question 3: What if the market moves in the desired direction after I've set a stop loss?

This situation is quite common in practical trading and is somewhat similar to a false breakout in trading.First, we must understand that this situation is inevitable. From a technical perspective, due to the randomness of trends and the unpredictability of the future, you will inevitably encounter a situation where the market moves after you have stopped the loss.

At this point, we can carry out some technical operations to compensate for the losses. For example, the batch stop-loss method we mentioned earlier. Another example is setting a stop-loss standard in the trading system, and then continuing to enter the market after the market moves again, trying to recover the losses through a second entry, and so on.

Question 4: Which method of stop-loss is the best?

There is no best method of stop-loss, only the one that suits you the most. As always, you must review or simulate your trading data, test the fit between each stop-loss method and your trading strategy, and then make the decision. Keep all other variables constant, try different stop-loss methods, see which one performs the best in terms of profit, and which one you can stick to the most, and then use that one.

Question 5: What if I just can't strictly stop the loss?

I have two suggestions for this issue.

First, you must establish your own trading confidence. For example, by doing a lot of review and simulation, ensure that your trading strategy is sound in the long-term market, and also know that a temporary stop-loss will not affect the overall profit, so you won't feel so tormented by each stop-loss.Second, if you truly cannot implement a stop loss and feel that there is no way to overcome this hurdle, I suggest you take a break from trading first. Because not being able to manage stop losses will prevent you from making a profit; I was once a bloody example of this. Until you overcome the psychological barriers to stop losses, it is best not to enter the trading market for a day. This is my best advice to you.

Stop losses and take profits play an absolutely crucial role in a trading system. They involve both technical skills in trading and psychological training in dealing. However, these issues cannot be avoided and require everyone to test and refine them diligently. I hope everyone can understand, see, and achieve this.