How to Set an Effective Stop-Loss Point?

Stop-loss is an extremely important concept for traders. Some argue that trading must involve setting a stop-loss, while others believe that relying solely on stop-loss reflects a lack of confidence. However, regardless of the perspective, setting a stop-loss is ultimately about protecting a trader’s
capital.

So, how should one set a stop-loss?

First, consider setting the stop-loss based on key levels. Key levels refer to points where you believe there is a high probability of a trend reversal or where the risk-reward ratio is significant. Specifically, based on your trading system and risk tolerance, identify suitable key levels to place your stop-loss.

Second, you can choose an effective stop-loss level based on the trading timeframe. This depends on the trading cycle. If you are trading on a shorter timeframe, placing the stop-loss at a longer timeframe level may be more effective. The advantage of setting an effective stop-loss is avoiding premature exits due to market noise, but it may also result in losses if the entry direction contradicts the market trend. It is recommended to use an effective stop-loss when the system indicates a high probability of accuracy. When testing counter-trend positions, consider reducing both position size and stop-loss distance.

Additionally, you can set a stop-loss based on historical trading records. By analyzing past trades, you can determine the average stop-loss points to assess the risk and rationality of the current trade. If the current stop-loss points far exceed the usual range, you may need to reconsider your entry point to avoid high-risk trades.

In summary, setting a stop-loss is about mitigating risk and safeguarding capital. The specific stop-loss strategy should be tailored to your trading system and risk tolerance. There is no one-size-fits-all method—adjustments must be made according to individual circumstances. Before entering a trade, consider the timeframe and purpose to determine an entry point within the stop-loss range, thereby managing risk. Trading is essentially about risk management, and stop-loss acts as a lock ensuring trading safety.