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  • I try to explain that same thing to my students and I think, you know, you just did an eloquent job there.

  • Um it's funny because when I meet a bunch of people that have been, you know, in the crypto markets for six months or even six years, a lot of them don't have that.

  • I call it almost like an algorithm in your brain.

  • You're almost programming your behavior before it happens, you're almost like the terminator.

  • And they're used to, you know, check in prices on mobile phones, trading at two in the morning trading when they're happy, they're sad, they're drunk, they're mad and trading with more frequency than they should be.

  • And then I come in and I say, guess what?

  • We're going to trade maybe once a week, maybe once a month before the trade goes on.

  • You put a stop loss in and you know where you're taking profits and they're like, you're taking all the fun out of this.

  • And I'm like, you know, this shouldn't be netflix, this is trading and this is p nl you just mentioned stop loss.

  • Let's talk about this scott because I felt like I put a big wet towel on my students when I talk about stop loss.

  • And it's funny to see the brain argue against stop loss, right?

  • Like when you tell your kids, I gotta go to bed early, they come up with all sorts of really good reasons why they shouldn't with the stop loss, They say, well what if I'm hobbling the markets are volatile.

  • I get triggered.

  • There's traders out there trying to trigger my stop.

  • I'm sure you heard that one scott.

  • Right?

  • So talk about, first of all, what a stop losses.

  • And also, where's that program profit trading in there?

  • And maybe we can give an example, like if someone went into Bitcoin right now, it's a 48,000.

  • Um, what would be a really sensible, smart long term strategy for putting those pieces in and maybe explain to people why their emotions are going to change right after that trade, there's a lot to unpack there.

  • So looking at Bitcoin as an investor, I'll buy it at every price and I do a dollar cost average blindly as a trader.

  • This is not somewhere that I'm interested in buying.

  • In fact, if I was a shorter term trader might looking tell a bit right?

  • If I was scalping purely with no emotional attachment to the asset and no longer term position.

  • Uh, to me a key level on the Bitcoin chart was 42,000.

  • That was the top of the entire move from the all time high at 20.

  • We stalled there for about a month.

  • Tesla bought $1.5 billion 40 through 42 and headed up to 65 when it lost that 42 level to me was sort of when the shorter term bear market narrative was entered and we stayed there since May 19 until just a few weeks ago.

  • Right?

  • So almost three months an entire boring summer of people find getting out of their houses and enjoying their lives and not trading.

  • Um and it took quite a bit of time to consolidate.

  • Accumulate and break that level.

  • So Levels are flexible.

  • I'm not saying if price goes to $41,999 that your thesis is broken, but to me, if I was going to enter trade and why wouldn't now that's too wide of a stop for me Because I think everything still looks bullish above 40 to 42,000.

  • So that would mean I'd have to put my stops in the 30, you know, below 40,000 somewhere.

  • And that's just way too big of a gap to make the risk reward worth buying at 48 as a trader.

  • So I personally, I'm always looking to enter more, I have bids in that area, I'm looking for the drop to buy and if I miss it, life goes on.

  • Right?

  • So my stop loss would be maybe 39,539,700.

  • So I'd much rather enter at 40 or 41 can enter at 48, right?

  • Because my position size would have to be so small Entering at 48 to be able to manage risk and only take a small portfolio loss.

  • So that's one thing the general importance of a stop loss is that and what people don't realize they view it themselves as losing, it's not losing.

  • Its an invalidation of an idea, it's admitting you're wrong.

  • That's the problem people have with it of course because people hate to be wrong and that's what destroys traders.

  • But it's an opportunity to find a better entry in my mind.

  • And if you say that mantra over and over again to yourself over years, you'll start to not view it as a loss but an opportunity for a better entry.

  • Okay, well I stopped out here.

  • That means it's going lower.

  • I can get in lower right if my thesis is correct.

  • Let's look at the next area where I would buy and try again and you can make up for that entire loss many fold if you're right on the next entry.

  • So to me you're gambling if you do not have a stop loss.

  • So what's the importance of a stop loss?

  • You're looking at a chart?

  • A chart is just a visual manifestation of human emotion.

  • Like we talked about before.

  • Why do you support and resistance and all these lines exist.

  • They exist because this is where all the same people are going to make bad decisions.

  • So your goal by looking at a chart as a trader is to make a good decision when everybody else is most likely to make a bad one, right?

  • This is where everybody's gonna panic sell.

  • I'm gonna buy it.

  • It's going to go the other way counter trading the crowd, but you're gambling if you don't have an invalidation because then you're just emotionally hoping and hope is obviously not a strategy.

  • So the first way you should approach trade, you look at the chart figure out where would ideally like to be in right, what's a good entry or you can start at the stop loss.

  • Where is any bullish idea invalidating?

  • Figure that out, figure out where I did ideal entry is calculate that gap and then back calculated to your portfolio size to figure out the size of your position, Right?

  • I want to lose 1% of my portfolio.

  • This is how much I will lose on this trade if I'm wrong.

  • This is how the size of that trade to make that math work seems complicated, seems boring like you said.

  • But it is, there was a famous quote that trade, I can't now of course I can't place the trader that said it.

  • But that, that trading should be more like watching paint dry if you want an excitement, go to Vegas at least you get free drinks right.

  • Um It should not be gambling, trading should be extremely extremely boring because you should have a plan and weight and then once the plans enacted, you shouldn't watch the chart to figure out what's going to happen because you know where you're going to exit either up or down.

  • So if your training without a stop loss, you are gambling 100%,, 100% gambling and like I said, this comes back to the core idea.

  • Do you want to be right or do you want to be rich Because your your average trader maybe if they have an edge is right?

  • 55% of time, Right?

  • Yeah.

  • I was a part of a sports gambling group where we bet on every single NFL game for the entire season on a spread And the person who gets the most right at the end of the season, out of hundreds of people wins the entire pot huge pot.

  • And every year it's consistently someone who gets 56, of them correct right against the spread because Vegas is good.

  • So your edge doesn't come with being right.

  • Your edge comes with being wrong small and being right big, right?

  • Taking the right trades where you're going to lose very little if you're wrong and when you have a ton of upside so that 10 great trades in a year can invalidate 200 mrs right?

  • And so once you program yourself to realize you weren't, It doesn't matter if you're wrong.

  • It was just, you took a small loss and your next one will pay for it or your 10th one will pay for it.

  • It really starts to change the way you approach the market.

  • Yeah, that's powerful.

  • I like that entering at a better level and it's the, it's when people get cleaned out, it's that one time they didn't stay disciplined and don't have the stop right, correct.

  • You lose your entire stack on one trade because you get liquidated and move your stop loss.

  • Are you, are you or are you revenge traded?

  • That's the other one, right?

  • Your stop loss does hit and then you enter immediately again because you feel like you were wrong, which is the same thing, is not using a stop loss.

  • Revenge trading was my biggest problem as a trader in the early days because I hated being wrong.

  • I got pissed off and I came right back in and it turns out I was actually right to have my stop loss and take that loss because that was a good plant that I had before, I was emotional and revenge trading over and over again.

  • You just basically taking the same loss of the same trade, banging your head against the wall.

  • How long would you wait between getting stopped out and getting back in like hours a day?

  • It could be moment.

  • I mean, it could be literally within an hour, certainly days.

  • I came up with a rule for myself and people need rules.

  • You need to know yourself and come up with rules and I share this with people all the time.

  • Very difficult for me now because I'm doing so much analysis for other people.

  • Um, but if I any trade that closed whether profitable or at a loss, I closed that chart for 24 hours and don't look at it Like a firm rule that I'm not allowed to even utter the name of that asset for 24 hours.

  • Right?

  • Very, very hard with its Bitcoin and you're looking at it all the time.

  • But you know, and so that also prevents you from jumping back in the same thing that makes you revenge trade when you lose, makes you jump back in higher when you exit a trade for profit and think it's going to continue going up so you buy again and lose the entire amount that you would make.

  • That's a great rule.

  • Maybe we should be longer than 24 hours.

  • I guess.

  • It depends on what you do and you're frequently yeah.

  • If you're like if you're a day trader and you're only trading three or four assets, I think 24 hours is sufficient.

  • Uh huh.

I try to explain that same thing to my students and I think, you know, you just did an eloquent job there.

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Scott Melker on The Importance of a Stop Loss When Trading ?

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    林宜悉 posted on 2021/09/07
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