Stop loss is touted as the indispensable "life saving" principle in investing, but let's scrutinize its logical absurdity once and for all.
first, the stop loss point is relative to your purchase point, so if the same stock drops, it triggers some people's stop loss rule, but some other people's appetite to bottom fish. There's no absolute standard to measure an investment decision. Everything is relative. But how can the same stock be good and bad at the same time, for people who piously follow the same stop loss principle? Unless, of course, it is quantum mechanics...
Second, the assumption of stop loss is that it will continue to fall. This, however, requires the assumption of momentum existing universally everywhere every time, which is a very strong yet impossible assumption.
third, the nature of stop loss is no more than a random decision to sell based on astrology or other factors. Wall Street know it, so they trigger people to stop loss so easily as they do a puppet.
then why do some people swear it is stop loss that saved their investment life? Perhaps biological life too, in some extreme cases. That's because stop loss essentially cuts an investment into random pieces on time axis, thereby presenting some kind of "time diversification". This is different from "spacial diversification", where different stocks are picked, but each stock is a whole piece, not further divided into pieces on time axis.
In fact, when your portfolio are diversified, even if one stock drops to zero, it is not enough to cause panic selling, and you don't have to "stop loss" a stock at precisely an unfavorable price, which is nothing more than some whimsical impulse, far from being an educated investment decision.
