Placing stop-losses sensibly

A stop-loss is an order that closes your trade automatically at a set price to cap your loss. A sensible stop sits at the point where your trade idea is clearly proven wrong, far enough from entry to avoid being hit by ordinary price wobbles.

Base stops on the market, not on money

A common mistake is choosing a stop because of how much you want to lose, for example "I'll use a 10-pip stop so I only lose $100". The market does not care about your account size. Instead, decide where the trade is invalid, then use position sizing to keep the loss within your risk limit.

Common ways to place stops

• Beyond structure: below a recent swing low for a buy, or above a recent swing high for a sell. If price breaks that level, the idea behind the trade has likely failed.
• Beyond support or resistance: just past a level the market has respected several times.
• Volatility-based: using a measure of the pair's typical movement, such as the Average True Range (ATR), which shows the average size of recent price ranges. A stop of 1.5 to 2 times the ATR is one illustrative approach.

Allow for the spread and noise

Sell stops on long trades are triggered by the bid price, and buy stops on short trades by the ask. Spreads widen at news times and in quiet hours, so a stop placed exactly on an obvious level can be clipped without the market truly breaking it. Leaving a small buffer helps.

Things to avoid

• Moving your stop further away once a trade goes against you. This raises your risk after the fact.
• Trading with no stop at all, hoping to manage it in your head.
• Placing stops so tight that normal movement closes the trade almost every time.

Key takeaways

• Put your stop where the trade idea is proven wrong, not where the loss feels comfortable.
• Use structure, key levels or volatility to choose a logical stop.
• Leave a buffer for spreads and normal noise.
• Never widen a stop to avoid taking a loss.