What Is a Stop Loss?
💡 Definition
A stop loss is a predefined exit rule that closes your position when price invalidates your idea or risk limit. Good stops are planned before entry, anchored to structure/volatility, and integrated with position sizing so losses are small and survivable.
Stops don’t predict — they protect. They turn uncertainty into a fixed cost so your edge and discipline can compound.
Visual Representation
Entry • Initial Stop (Structure/ATR) • Trailing Stop • Targets
Define the initial stop under invalidation (swing/ATR). As price trends, trail to lock gains. Take partials at +R multiples or targets; never widen stops.
Core Stop-Loss Types
📍 Structure Stop
Place beyond a clear invalidation level (e.g., long: below prior swing low/VAL; short: above swing high/VAH).
📏 Volatility (ATR) Stop
Set stop at k×ATR (1.5–3.0×) beyond entry or structure to absorb normal noise.
🪜 Trailing Stop
Ratchets with trend (Chandelier, MA/Parabolic SAR, higher-low method) to lock profits while leaving room to run.
⏱️ Time Stop
Exit if a setup fails to progress within N bars/sessions or before key events (earnings, macro prints).
➗ Break-Even Rule
After +1R or TP1, move stop to entry to eliminate downside on the remainder (use thoughtfully to avoid premature exits).
🧯 Hard vs Soft
Hard = resting order at broker. Soft = discretionary/manual based on rules (requires discipline and presence).
Key Formulas & Recipes
Stop Distance & Sizing
|Entry − Invalidation| or k × ATRSize = (Equity × r%) / StopDistanceR = (Price − Entry) / StopDistance (longs; flip sign for shorts)Popular Trailers
Stop = HHₙ − k×ATRₙ (k≈3, n≈22)Stop = MA(20/50) − buffer (close below MA exits)Why Stops Work (Practically)
- Asymmetric Math: Small, fixed losses + occasional large wins = positive expectancy.
- Noise Adaptation: ATR/structure-based distances fit market rhythm, reducing random knock-outs.
- Process Clarity: Precommitted exits reduce hesitation and hope.
- Capital Survival: Drawdowns stay shallow so edge can play out over many trades.
Practical Playbook
Step-by-Step
1) Define Invalidation: Choose structural line in the sand (swing, profile level) or volatility multiple.
2) Compute Size: Use your risk % and stop distance (see Position Sizing page) — no stop, no trade.
3) Place & Forget (Initial): Hard stop at broker; do not widen.
4) Manage Winners: At +1R take partials or move to break-even; trail by chosen method.
5) Event Awareness: Tighten or flatten before high-impact events if they don’t favor your setup.
6) Review: Track stop-outs: were they noise (too tight) or valid invalidations (good stop)? Adjust k/structure rules.
Common Mistakes
⚠️ Avoid These Errors
- Widening stops after entry (“hope mode”).
- Setting stops exactly at obvious highs/lows (liquidity sweeps); place beyond the level.
- Using fixed pip/tick stops across assets with different volatility.
- Moving to break-even too early and getting tagged out before the move.
- Ignoring gaps/slippage risk around news/overnight sessions.
Advanced Concepts & Variations
🧮 Multi-Scale Stops
Use HTF invalidation for swing bias, LTF stop for entry timing; escalate to HTF trailer as trade matures.
🧷 Hybrid Stops
Structure and ATR: “below swing low − 1×ATR buffer” for robust placement.
🪙 Partial Exits & Re-entries
Scale at +1R/+2R; if trailed out on noise, re-enter on fresh trigger if thesis remains.
🧯 Gap/Overnight Protocol
Use wider stops or reduce size before earnings/news; consider options hedges or flat positions.
The Bottom Line
Stops are your seatbelt. Anchor them to structure or volatility, size positions from the stop distance, never widen, and trail winners methodically. With disciplined exits, your edge gets room to work — and your capital lives to trade another day.