To understand 'stop-loss', one must first recognize a cruel truth: the market does not care about your entry logic, holding cost, and is even disdainful of your profit fantasies.
The core of stop-loss is never about 'cutting losses', but about distinguishing between two completely different operations - effective stop-loss and meaningless stop-loss.
✅ Effective stop-loss: after cutting the position, the account does not suffer significant damage, the trading system can operate normally, and the mindset does not collapse; in the long-term statistical dimension, it can reduce account drawdown and preserve the foundation for compound growth.
✅ Meaningless stop-loss: either the price returns to the original trend immediately after cutting, missing the opportunity; or the stop-loss range is too small to withstand fluctuations and ultimately results in liquidation; more fatal is prematurely killing the trend position that should have made a big profit, completely disrupting the trading rhythm.
The four most commonly used stop-loss models in trading, each suitable for different scenarios:
1. Fixed amount stop-loss: Suitable for high-frequency or quantitative strategies with high win rates and stable risk-reward ratios, locking in risk with a fixed loss amount.
2. Percentage drawdown stop-loss: After going long, decisively exit when the price falls N% (e.g., 6%) from the high, which allows profits to run while locking in some floating gains.
3. ATR volatility stop-loss: Based on the 14-day ATR, multiplied by a coefficient k (usually 2-3) to dynamically adjust the stop-loss level, avoiding being shaken out in volatile markets.
4. Structural stop-loss: The preferred choice of subjective traders, triggered by breaking below previous lows, previous highs, trend lines, or the closing price of moving averages; can be combined with a 'time stop-loss': if the key structure cannot be recovered within 3 days, exit immediately.
From the experience of trading Bitcoin, one can summarize a counterintuitive conclusion: it's better to set stop-losses a bit wider. Taking a long position on Bitcoin with a capital of $100,000 as an example, a 5% stop-loss (i.e., setting the stop-loss below $95,000) seems to incur a significant loss in a single trade, but the long-term effect is far better than a narrow stop-loss.
The root cause of most people's liquidation is not 'wrong judgment' — trading is a game of probabilities, and no one can always predict the right direction. The real fatal flaw is 'stop-loss failure': after a few white stop-losses, one gives up on stop-losses with a sense of luck; and after a few successful resistances, one firmly believes that holding positions is the way to go.
However, the market will eventually not give you a chance to 'hold it back,' just like the extreme market situation in 1011, where those who did not set stop-losses in advance had no opportunity to cut losses and exit. You can withstand it 9 times because the market 'allows' it; but that one time when the market does not allow it can lead you to a 100% loss.
