Of course, contract stop-loss is extremely important and can be said to be the cornerstone of survival and long-term success for traders and investors in the financial markets (especially in the high-leverage derivation markets). Not understanding or not executing stop-loss is like driving on a highway without wearing a seatbelt; it may seem fine for a short time, but once an accident occurs, the consequences will be disastrous.

The following is a detailed explanation of the importance of contract stop-loss:

1. Core Importance: Survival is the top priority.

The core rule of the financial market is not "how much money to make," but rather "survive first." The direct purpose of a stop loss is to protect your principal.

1. Prevent catastrophic losses
· "Liquidation" risk: Contract trading usually involves leverage. While leverage amplifies profits, it also greatly magnifies losses. Without a stop-loss, an unfavorable price fluctuation could result in losing most or even all of your margin, leading to liquidation and completely losing the chance to recover.
· Avoid deep entrapment: Even without using leverage, not setting stop-loss orders can lead to deep entrapment of positions, with funds being tied up for a long time, resulting in huge opportunity costs and significant psychological pressure.
2. Manage risks and keep losses within an acceptable range.
· A successful trade does not mean that every transaction is profitable, but rather that the profits are large and the losses are small. By using stop-loss, you can actively control the losses of each trade within a preset, acceptable range (for example, each loss does not exceed 1%-2% of the total capital).
· This ensures that even if you make several judgment errors in a row, your account funds will not suffer a fatal blow, preserving your capital to continue trading.

2. Psychological Aspect: Overcoming Human Weaknesses

Trading is largely a psychological game. Stop-loss can help you establish trading discipline and combat the weaknesses of human nature.

1. Overcome luck and greed
· When prices fluctuate in the opposite direction, human nature tends to think "I'll wait a bit longer, maybe it will go up/down again." This gambler's mindset is the root of losses. A predetermined stop-loss strategy allows you to execute your plan objectively before emotions take over.
2. Overcoming Fear and Hope
· When experiencing losses, people may refuse to stop losses due to the fear that the loss will become a reality, while simultaneously hoping that the market will reverse. This conflicting psychology can lead to indecision, turning small losses into large ones. A stop-loss discipline can help you decisively cut off losses.
3. Maintain a calm mindset
· Knowing your maximum loss allows you to trade more calmly. A clear stop-loss plan can significantly reduce your psychological stress and prevent you from making irrational decisions due to emotional fluctuations (such as revenge trading, blindly increasing positions to average down costs, etc.).

The cornerstone of systematic trading

A complete trading system must include a clear stop-loss strategy.

1. Achieve quantitative risk-reward ratio
· Before trading, you need to assess the potential profit and potential loss of the transaction. Setting stop-loss and take-profit levels allows you to calculate a clear risk-reward ratio (for example, potential profit is 3 times the potential loss). Only trades with a suitable risk-reward ratio are worth participating in.
2. Provide clear failure signals
· The stop-loss level is not just a price point, but a signal that your trading logic has been disproven by the market. You entered the market because you believed the price would move in a certain direction; if the price hits the stop-loss, it indicates that your judgment may be wrong, and the market has told you the answer with real money. At this point, you should decisively exit and respect the market.

How to set stop-loss scientifically?

Stop-loss is not set arbitrarily; unreasonable stop-loss will also lead to losses.

1. Technical Analysis Method (commonly used)
· Support/Resistance Levels: For long positions, set the stop loss below the key support level; for short positions, set it above the key resistance level. Avoid setting the stop loss at obvious positions that the market can easily reach.
· Moving Average: For example, set the stop loss for long positions below important moving averages (such as the 30-day and 60-day moving averages).
· ATR (Average True Range): Set stop-loss based on market volatility. For example, stop-loss distance = 2 times ATR. This is very effective in volatile markets and can prevent being shaken out by the normal "noise" of the market.
· Fixed Percentage/Points: Set a fixed loss ratio based on account funds (e.g., 2%).
2. Capital Management Method
· This is a more fundamental approach. First, based on your total capital and the maximum acceptable loss per trade (e.g., 1%), work backward to determine how many contracts you should trade. The size of the contracts must be determined by the stop-loss distance, rather than deciding the contract size first and then setting the stop-loss.

Common misconceptions about stop-loss.

· "Not cutting losses, eventually it will return to profit": This is the most dangerous misunderstanding. The market may not come back (in the case of a one-sided market), or it may take a very long time, during which the opportunity cost and psychological torment are enormous.
· "Frequent modification of stop-loss": When the price approaches the stop-loss level, one keeps moving the stop-loss in hopes that the market will give them "a chance." This is equivalent to giving up risk control, which usually leads to greater losses.
· "After the stop-loss is triggered, the price goes back": This situation can indeed occur and is referred to as "spike" or "stop-loss hunting". However, this is just one of the costs of trading, similar to paying rent in business. Using reasonable stop-loss methods (such as the ATR method) can reduce this occurrence, but we cannot avoid it completely. The disaster caused by not using a stop-loss once is far greater than the minor losses of ten normal stop-losses.

Summary

The importance of contract stop-loss cannot be overstated. It is not only a "safety belt" for protecting funds but also a core discipline for professional traders.

· From a survival perspective, it is a firewall to prevent account destruction.
· From a psychological perspective, it is a ruler for maintaining trading discipline and overcoming human weaknesses.
From a system perspective, it is the cornerstone for achieving long-term stable profits.

Remember a fundamental saying in the trading world: "Cut losses and let profits run." The first and most important step in "cutting losses" is to scientifically and decisively execute stop-loss orders. In the high-risk field of contracts, without stop-losses, success is impossible.