Stop-loss: where should the stop go, and why?
A stop-loss is not a number you pick based on how much you can stand to lose. It is the place where your trade idea is wrong. You size the position afterwards.
Short answer: place the stop at invalidation, the level where the reasoning you entered on no longer holds. Then let the distance to the stop set your position size, not the other way around.
1. Start with the question: when am I wrong?
Before you think about the loss amount, you should be able to say what has to happen in the market for the idea to be dead. That could be a break below support, a close under a prior low, or a momentum shift you did not expect. If you cannot answer, you do not have a setup, and it is not a stop problem.
2. Put the stop behind structure, not on it
Round numbers and obvious levels attract orders. A stop just under a round number often gets hit by a quick wick, after which price reverses. Give the stop some room behind the level so ordinary noise does not take you out. How much room is enough depends on volatility. One approach is to look at recent swings and choose a distance outside them.
3. Use volatility as a ruler
A stop that is sensible in a calm market can be too tight in a busy one. Many traders use a measure of average range (for example ATR) and place the stop a couple of multiples of it from entry. That is a rule of thumb, not a guarantee. The point is that the stop should relate to how the market is actually moving right now.
4. A wide stop means a small position
When the stop is far away, the position must be smaller if risk is to stay the same. That is why order matters: invalidation first, then distance, then size. Read more in our note on position sizing.
5. Do not move the stop further away
Moving a stop further from entry because price is approaching it is the fastest route to a loss larger than planned. You may move a stop in your favour, for example after a target is hit, but never so that you risk more than you decided in advance.
6. Remember a stop is not a guarantee
In fast markets, over weekends or at low liquidity, an order can be filled worse than the stop (slippage). Assume the planned loss is a minimum. See the glossary for slippage and stop-loss.
Checklist
- Can I say in one sentence what makes the idea wrong?
- Does the stop sit behind a level rather than on it?
- Is the distance sensible relative to recent swings?
- Is the position sized from that distance?
- Do I know what I will do if the stop is hit?
What this note is not
This is not a recommendation of any particular distance or level. A Cryptomanden signal is decision support with entry, invalidation and targets. Whether you trade, and how much, is your responsibility.
Trading involves risk. Past results do not guarantee future results. This article is education and general market information only, not personal financial advice.