[The Trading Chapter] Episode 29: The painful "Acceptance of defeat." The honest art of cutting losses to survive in the market ⚓️

Last time (the 28th session), I spoke about the beauty of confirming profit by not chasing greed and securing gains when they are already there. The moment you lock in profits, your analysis is proven correct, and it is a happy moment for everyone.

But this time, in trading, the most painful reality that almost everyone would rather look away from, the “stop loss,” is something I want to face squarely. I have myself seen painful consequences when I could not cut losses in the past. Therefore, with a humble heart, please allow me to share Elder Doctor’s teachings with you all.

1. Wall Street is ruthless to losing gamblers

If you are chasing the thrill in trading, I would recommend going to a real casino. Elder Doctor gently but sternly admonishes those who trade without placing stop-loss orders.

In casinos like Macau or Las Vegas, they might offer you free drinks or even free lodging while you’re enjoying the gambling. However, on Wall Street (the financial markets), there is no such comforting service for gamblers who wipe out their money. Trading without stop-loss orders is nothing but reckless gambling that endangers your funds. For long-term survival and success, stop-loss orders are indispensable.

2. Why do we come to hate stop-losses?

On one hand we know “stop-losses are important,” but why are many of us reluctant to use stop-loss orders? It’s because the market teaches us not to use stop-loss orders and ingrains bad habits.

Have you ever had this experience? You buy a stock and place a stop-loss, and that order gets executed and the losses are realized. Then right after, the price reverses and rises as you initially expected. You think, if you hadn’t placed the stop-loss, you would have avoided the loss and perhaps made a profit. It’s a frustrating feeling that everyone has had. After repeating such unpleasant experiences several times, we gradually come to detest stop-loss orders.

Then we begin trading without stop-losses and enjoy a period of “happiness” when things go well for a while. But that joyful period ends when a big trade moves in the wrong direction. As losses accumulate from waiting without cutting, a crisis of survival (a shark’s bite) arrives, and confidence shatters into pieces.

3. The professional’s essential tool: a lifeboat to prevent a catastrophe

Elder Doctor compares stop-loss orders to a life jacket you wear when kayaking. When you kayak, you don’t start by assuming you’ll fall into the water, but for safety and legal reasons you wear a life jacket. It may hinder your movement at times, but it is a vital protection that can save you from potentially fatal accidents.

The same applies to trading. No matter how confident you are in a “Grade A trade,” there is no absolute certainty in the market. Therefore, as you enter a trade, you should set a valid order (GTC) that remains active until canceled to “prevent a catastrophe.” This will be your lifesaving lifebuoy that saves your capital from ruin.

4. Where should you place stop-losses? (Humble ingenuity)

So, specifically, where should you place stop-loss orders to reduce the sad incident of “being hunted and then reversing”?