3. The essence of stop loss and take profit
As you already understood, this is what take profit and stop loss allow to do 🙂
In order not to freeze their use in trade, you need to understand that the outcome of any transaction is ALWAYS probabilistic.
The only certainty that the market can give is price patterns/patterns repeating from year to year + the fact that at no point in time it can be said whether a pattern is formed or not.
Based on this, the trader is simply reinsured for both cases. If it forms, then in the place where the formation is completed, the take is triggered, and the trader makes a profit. If it does not form, a stop is triggered in the place where “pattern formation is canceled”, and the trader loses quite a bit.
“But after the formation of the pattern, the price can go further” … “And when the stop loss is triggered, it can still unfold – and loss can be avoided.” By itself. But we must remember that in these cases we again have 2 (!) Scenarios. After the take, the price can either go further or turn around – and then the trader will lose profit. And after the stop, it can both turn around and move on – and then the trader can lose much more.
So, all of the above leads us to the following:
Stop-loss, first of all, fixes the fact that the expected scenario did not happen.
Take profit, first of all, fixes the fact that the expected scenario has occurred.
And both of these points are always understood at strictly defined points on the chart, and not because “the loss is too big already” or “the profit is already enough”.
Once again: at any entry point and in any scenario, no one knows in advance whether the expected scenario will happen or not. However, at the time of entry, we can determine:
- at what point the price will confirm that the scenario “worked out”;
- at what point the price will confirm that the scenario “did not work.
Roughly speaking, the initial goal is to find a repeating price pattern and determine for oneself at what point it “did not happen” and at what “happened”. And thereby recognize that at the time of entry you cannot (alas!) Find out in advance where the price will go, but you can only prepare for the 2 possible options.
When this step is taken, the trader realizes that with stop loss and take profit, he brings more certainty to his trade. And certainty is nice, regarding such an uncertain thing as the price chart 🙂
When we are trading not a “guessing game”, but a previously identified, expected (and ideally a hundred times tested for profitability) scenario, then trading it without stop loss and take profit is simply impossible. Because the trader somehow needs to fix the fact of the “happened” and “non-occurred” scenario.
When a trader comes to trading “scenarios”, the question “what if he suddenly turns around” no longer arises. Because the scenario trading approach itself implies a trader’s refusal to predict future price movements. There is either a “pattern formed” or a “pattern not formed”, and the trader knows in advance at which point “yes” and at which point “no”.
The “scenario” approach also eliminates stops in the amount of a certain number of points. Well, for sure, they read how the rules to some strategy say that “stop-loss is no more / less than 10/25/45/999 points”. True, it is also not known, because of which such a figure. So, when trading scenarios, a stop is placed based on the situation, like a take. As a result, the trader is not dependent on changing volatility.
Instead of a conclusion, I would like to note that without proper “internal experience”, a trader will not be able to force himself to trade in a “scenario way”. Because as long as there is hope “to find the very thing that will predict the price”, the scenario approach will seem to be something wretched, unfinished and, so to speak, a “loser” way of trading for intellectually deprived individuals who “could not”: ) However, when you are not just in words, but REALLY tormented to look for the very method of price prediction – perhaps you will recall this article, and then it will produce the effect for which you thought 🙂