Starting from April of this year, I have written a series of technical articles, reorganizing the four components of a trading system for everyone, including trend confirmation, entry, exit, and money management, etc.

In today's article, I would like to explain the eight most commonly used stop-loss methods, which is the last component of the trading system.

You can combine all these articles for reading, and learn from the methods in these articles to improve your own trading system.

1. Three perspectives on stop-loss

Before explaining the specific stop-loss methods, I have three personal insights on stop-loss that I would like to share with everyone.

First: If you want to achieve long-term profits, stop-loss is an inevitable existence.

Many people wonder why I need to use a stop-loss? Stop-loss is so uncomfortable, it means loss, it means failure. Many trades, looking at the historical trajectory, can actually be held to profitability, so why use a stop-loss?

Because if you don't set a stop-loss, it's equivalent to infinitely magnifying the risk. In futures and forex markets with leverage, blowing up an account is very easy. When you have worked hard for a month to earn a few hundred dollars, and then lose $10,000 in one go due to not using a stop-loss, you will engrave the concept of stop-loss in your very being.

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We need to survive in the market now to have the possibility of making money.

Second: The most difficult part of stop-loss is the psychological barrier.Everyone experiences emotions in the trading market, especially when it comes to stop-losses. There's a sense of fear, the dread that this trade will be stopped out again, which is quite uncomfortable; or there's a feeling of reluctance, wondering why there's another loss?

The best way to overcome these emotions is to have a trading system and conduct ample backtesting to see how your system performs in terms of stop-losses in historical market conditions. How many times has it stopped out at most? What's the maximum amount it has stopped out at? At its worst, how much did it stop out before turning a loss into a profit?

Once you know these extreme values, it greatly helps in overcoming the fear of stop-losses in real trading scenarios.

(3) Having a structured approach to stop-losses is crucial.

Some people know they need to set stop-losses, but each time they do it differently, based on their feelings. This situation is actually very bad. Sometimes, when the amount is small, they think it doesn't matter, and then suddenly they blow their account. Other times, when the amount is large, they are overly cautious, stopping out at the slightest loss, only for the market to reverse and trend strongly.

Therefore, in trading, we must establish fixed rules for stop-losses and coordinate them with other elements of our trading system to achieve profitability.

Next, I will share 8 stop-loss methods that I have found to be effective in real combat, which you can use as a reference for your own stop-loss criteria.

Additionally, I have previously written about methods for determining trend direction, 9 small-scale entry patterns, intraday exit strategies, and capital management methods, all of which are available in my public account: Eight-Digit Garden. I recommend that everyone reads these in conjunction.

2. Eight Methods of Stop-Loss

Method 1: Resistance and Support Level Stop-Loss.After the order is placed, look for the resistance and support levels above or below this level to set the stop loss.

For short positions, set the stop loss above the resistance level, and for long positions, set the stop loss below the support level.

Points to note:

(1) The space for each stop loss is not the same, so pay attention to the use of position size. A fixed amount of capital management method for each stop loss can be used, where the stop loss amount divided by the stop loss space equals the position size.

(2) You can use support and resistance levels at this level or at a larger level than this level as the stop loss, but you cannot use support and resistance levels at a smaller level than this level as the stop loss.

Method 2: Set stop loss at the previous high or low of the market's initial wave.

This is the most commonly used method for setting stop losses and is also the most commonly used stop loss method in right-side trading.

After the first wave of the market starts and the direction is established, look for opportunities to enter the market. After entering, set the stop loss at the previous high or low of the initial wave.

Points to note:

The space for each stop loss is not fixed. When the pullback is insufficient, for example, when the pullback is less than 38.2%, the stop loss space will be larger, so pay attention to position control.Method 3: Stop loss at the high or low point of the market correction wave.

After the market's initiation wave has completed, enter the market after the correction wave is established, and set the stop loss at the high or low point of the correction wave.

Points to note:

(1) Compared to setting the stop loss at the high or low points of the market initiation wave, the space for the stop loss is smaller, and the profit-to-loss ratio is more reasonable.

(2) Sometimes the correction wave can be quite complex, and orders may be stopped out consecutively by fake breakouts, so be mentally prepared. In the chart above, the first entry of the British pound was stopped out in such a situation.

Method 4: Moving average stop loss.

After the order is entered, if the price reverses and breaks through the moving average, the order is stopped out. This type of stop loss is generally also used in moving average trading systems.

Since the stop loss method by price reversing and breaking through the moving average is relatively aggressive, it is possible to use two moving averages or three moving averages for stop loss in batches. For example, the 90-day moving average added in the chart divides all orders into two batches for stop loss exit (the two green circles in the chart).

Points to note:

(1) If using a batch stop loss method, you can flexibly allocate the proportion of each stop loss position.(2) The stop-loss space is not fixed; the use of positions should be reasonable, it is better to be light rather than heavy.

(3) In practice, using multiple moving averages for batch stop-loss is more feasible.

Method 5: Stop-loss based on the high and low points of consolidation patterns.

This type of stop-loss is often used in trading systems that enter after a break of a consolidation pattern. After the break of the consolidation pattern, the stop-loss is set at the high and low points of the consolidation pattern.

During a downtrend, the market goes through a descending triangle consolidation. After the consolidation breaks, the order enters, and the stop-loss is set at the high point of the consolidation pattern.

Points to note:

Both reversal patterns and continuation patterns can be used. For example, rectangle consolidation, triangle consolidation, flag consolidation, double tops and bottoms, head and shoulders bottom pattern, and head and shoulders top pattern.

Method 6: Fixed amount stop-loss for left-side trading.

Left-side trading belongs to the trading logic of guessing tops and bottoms, buying during a downtrend, and selling during an uptrend. Sometimes it is difficult to find a reasonable technical position to set a stop-loss, and a fixed amount stop-loss method can be used.

For example, in a top and bottom guessing trade, set a stop-loss of 3% of the principal. The position can be determined based on the product's volatility. After the order enters, if the loss reaches 3% of the principal, close the position and wait for the next opportunity.Translation of the provided text into English:

**Points to Note:**

(1) It is better to be conservative rather than aggressive in the use of position size.

(2) You can use a method of entering the market in batches, and once all orders reach the stop-loss amount limit, close all positions at once.

(3) The principle of position sizing is to use a lighter position for highly volatile instruments and a heavier position for less volatile instruments.

**Method 7: Fixed Space Stop-Loss for Left-Side Trading.**

The logic of left-side trading, which involves guessing tops and bottoms, enters the market without finding a reasonable technical level for a stop-loss, and instead, chooses a fixed stop-loss space.

For example, in a long trade, a fixed stop-loss of 500 points is set upon entry. If the market moves another 500 points down, the order is stopped out.

Points to Note:

The operation is quite challenging, as different instruments and time frames require different stop-loss spaces, which need to be adjusted flexibly.

**Method 8: Trailing Stop-Loss.**After an order is placed, first set an initial stop loss. Once the order has generated a certain floating profit, adjust the stop loss according to the profit.

For example, if you hold a long position, after a floating profit of 300 points, adjust the stop loss upwards. It's like climbing stairs, adjust upwards every time you make a profit of 300 points, only adjust upwards, not downwards.

Points to note:

(1) Different varieties or trading different time frames require different spaces for setting trailing stops.

(2) There are many ways to set trailing stops, such as pivot points, high and low points of candlestick charts, and support and resistance levels, all of which are viable options.

3. Precautions for stop loss

(1) The method of stop loss should be chosen according to different entry methods.

For example, for pattern breakdowns, it is more suitable to use the high and low points of candlestick charts for stop loss; while the moving average stop loss method is suitable to be combined with the entry method based on moving averages.

In a trading system, the entry and stop loss should complement each other for better profit results. You can do more combination tests, practice more on backtesting software or demo accounts, and confirm the profit effect is correct before entering the real market.

(2) There is no best or most perfect method for stop loss.Do not fall into the trap of recent preference, thinking that if this method works well recently, use it, and if it doesn't, quickly switch to another one. This kind of thinking is very fatal.

The most important thing is not what method you use, but that you must have a method and then consistently implement it, and statistically analyze the trading results of this method. Only then can we know how to optimize it.