Where to place the stop
The stop-loss goes where the idea stops working, not where the money stops hurting.
Where to place the stop — what it is?
A stop-loss is not an admission of defeat but the price of information. It answers one question: at what price move does the idea stop being valid.
Hence the placement rule. The stop goes not at a comfortable distance and not where you feel like putting it, but beyond the level past which the markup stops working.
The second consideration is not to stand with the crowd. The obvious spots beyond extremes and beyond flat levels get swept regularly, because that is exactly where the liquidity sits.
Where to place the stop — how it is built?
The stop-loss goes beyond the far boundary of the zone plus a buffer. It is convenient to set the buffer through volatility rather than in points: then one rule works on both EUR/USD and bitcoin. The distance to the stop determines position size, not the other way round.
Where to place the stop — common mistakes
Placing the stop flush against the zone boundary — without a buffer, ordinary noise takes it out.
Moving the stop further away when price approaches it.
Trading without a stop, replacing it with an intention to close manually.
Fitting the stop to the size you want instead of the reverse order.
Related to
Glossary
- stop-loss
- an exit level set in advance for a losing trade.
- range
- movement inside a horizontal corridor with no clear direction.
- liquidity
- a cluster of pending orders and stops in a particular zone. The fuel for large capital to move.
- volatility
- how far price swings over a period. High volatility means big moves in both directions.
- Bitcoin
- the first and largest cryptocurrency by capitalisation.
- position size
- the size calculated so that the stop being hit costs a set percentage of the account.