The "crocodile principle" is the trading rule of the greatest trader.
The greatest trader in the world has a useful and simple trading rule-"crocodile principle". This rule comes from the way crocodiles swallow: the more the prey tries to struggle, the more the crocodile gains. Suppose a crocodile bit your foot. If you try to get rid of your feet with your arms, its mouth will bite your feet and arms at the same time. The more you struggle, the deeper you get. So, in case a crocodile bites your foot, remember: your only chance of survival is to sacrifice one foot. (No one wants to be bitten by a crocodile) If expressed in the language of the stock and futures markets, this principle is: when you know that you have made a mistake, you should be finished immediately! No more excuses, reasons or expectations, just leave! The necessity, volatility and unpredictability of stop loss are the most fundamental characteristics of the market, the basis of the existence of the market and the causes of risks in trading. This is an unchangeable feature. There is never uncertainty in trading, and all analysis and prediction are just a possibility. The transaction based on this possibility is naturally uncertain, and the uncertain behavior must have measures to control its risk expansion, so it produces a stop loss. Stop loss is a natural occurrence of human beings in the process of trading, not deliberately created, but an instinctive reaction of investors to protect themselves. The uncertainty of the market makes the existence of stop loss necessary and important. Successful investors may have different trading methods, but stop loss is the same feature to ensure their success. Soros, a world investment guru, said that there is no risk in investment itself, but out-of-control investment is risky. Learn to stop loss and never fall in love with loss. Stop loss is far more important than profit, because at any time, capital preservation comes first and profit comes second. It is quite effective to establish a reasonable stop loss principle, and the core of the steady stop loss principle is not to let the loss continue to expand. Why it is so difficult to understand the meaning of stop loss is very important, but this is not the final result. In fact, there are many examples of investors setting a stop loss but not executing it. In the market, the tragedy of being swept out of the house is staged almost every day. Why is it so difficult to stop loss?
There are three reasons:
First, luck. Although some investors know that the trend has been broken, they always want to have a look and wait because they are too hesitant, which leads to a good opportunity to miss the stop loss;
Second, frequent price fluctuations will make investors hesitate, and frequent wrong stop losses will leave lingering memories for investors, thus shaking their determination to stop losses next time;
Third, executing stop loss is a painful thing, a bloody process, and a challenge and test to human weakness. In fact, we can't be sure whether every transaction is in the right state or the wrong state. Even if it is profitable, it is difficult for us to decide whether to go out immediately or wait and see, let alone be trapped. The instinct of human nature to pursue greed will make every investor unwilling to win a few points less, let alone thank a few points.
How to correctly understand stop loss
The uncertainty of the market and the fluctuation of the price determine that the stop loss is often wrong. In fact, in every transaction, we are not sure whether to stop loss. If the stop loss is right, we may be secretly pleased. If the stop loss is wrong, there will be not only the pain of reducing funds, but also the pain of being fooled. Psychological blow is the most unbearable pain for investors. Therefore, understanding stop loss is essentially how to correctly understand wrong stop loss. We also have to accept the wrong stop loss. For a simple example, if your stop loss is correct in trading, it means that your trading is correct every time. If your trading is correct, why stop loss?
So,
Stop loss is a kind of cost, the cost of finding profit opportunities, and the price that must be paid for trading profit. This kind of price is only large and small, and it is difficult to distinguish right from wrong. If you want to make a profit, you must pay a price, including the price caused by the wrong stop loss. Face the wrong stop loss calmly, don't avoid it, and don't be afraid. Only in this way can we trade normally and finally make a profit. This is my understanding of stop loss, including my understanding of wrong stop loss.
Problems needing attention: 1. "Everything is established in advance, and it will be abolished if it is not predicted". All stop losses must be set before entering the market. When investing in futures, we must form a good habit, that is, set a stop loss when opening a position, and it is often too late to consider what standard to use when there is a loss. Second, stop loss should be combined with the trend. There are three trends: upward, downward and consolidation. In the consolidation stage, the probability of price stop loss making mistakes in a certain range is high, and the execution of stop loss should be combined with the trend. In practice, the author thinks that consolidation can be regarded as an incomprehensible trend, and investors can recuperate. Third, choose trading tools and grasp the stop loss point. This varies from person to person. It can be a moving average, trend line, shape and other tools, but it must be suitable for you. Don't use it blindly because others use it well. The determination of trading tools is very important, and the ability to use trading tools will lead to completely different trading results. In short, spot trading pays attention to a sound trading strategy, in which fund management can be regarded as its core and stop loss as its soul. Only by doing a good job in fund management and strictly stopping losses can we become a constant winner in the spot market.