Risk Management
Stop-Loss Placement
Place stops beyond invalidation levels — where the market would prove your thesis wrong — not at arbitrary dollar amounts.
Key rules
- Stop must be at the market structure invalidation point — where you're provably wrong
- Never widen a stop to avoid a loss; accept the loss or stay out
- Position size is calculated from the stop distance to ensure fixed % risk
- Stops below/above S/R zones, swing points, or trendlines are most logical
- Move stops in your favour (trail) as the trade progresses — never against
A stop-loss is an order to exit a trade at a predefined price level to limit your loss. The critical principle: stops should be placed at the level where your trade thesis is proven wrong — not at an arbitrary fixed dollar amount.
**The Core Principle** A stop-loss should be placed where the market structure invalidates your trade idea. If you're long expecting a bounce from support, the stop goes below the support zone. If the market closes below that zone, your thesis (support holds) is wrong.
**Common Stop Placement Methods**
**1. Below/Above Support and Resistance** Place your stop just beyond the S/R zone you're trading from. A close beyond the zone proves the level has failed.
**2. Beyond Swing Highs/Lows** Place stops beyond the prior swing low (for longs) or swing high (for shorts). The market making a new swing low/high in the opposite direction invalidates the trade.
**3. ATR-Based Stops** Use Average True Range to set stops a multiple (e.g., 1.5×ATR) beyond your entry. This accounts for normal market noise without getting stopped out prematurely.
**4. Trendline Stops** Place stops beyond the trendline being traded. A close beyond the trendline confirms it's broken.
**Avoid** - Mental stops (stops you intend to hit but don't have an order for) - Stops placed at round numbers (often obvious to other traders) - Moving stops further away to avoid a loss — this breaks all risk management principles