ForecastingStocks

A stop-loss is a pre-set order that closes a losing trade at a defined level. It is the single mechanism that converts an open-ended risk into a known, fixed one — and it is what makes the position-sizing math of the previous chapter possible at all.

Place the stop where your idea is wrong

The cardinal error is placing the stop based on how much you want to lose. Reverse it: put the stop at the price that proves your trade idea wrong, then size the position so that distance costs only your 1-2%. The market decides where wrong is; your size adapts.

Below structure for a long — under a recent swing low or support level.
Above structure for a short — over a recent swing high or resistance.
Volatility-based — a multiple of ATR, so the stop sits beyond normal noise and is not triggered by routine wiggles.

Give it room, then size down

A stop placed too tight gets hit by ordinary market noise before your idea has a chance — death by a thousand small losses. The fix is not a tighter stop but a smaller position: widen the stop to a sensible level, then reduce size so the dollar risk stays at 1-2%. A correct stop with a small size beats a cramped stop with a large one every time.

Honour it

A stop you move away when price approaches it is not a stop — it is a hope. The entire benefit of the tool comes from it being non-negotiable once set. The one acceptable adjustment is moving it in your favour (a trailing stop) to protect a profit, never against you to avoid taking a loss.