Where should you put a stop-loss?
Put your stop-loss at the price where your trade idea is proven wrong, not at a round number or an amount you'd "like" to lose. For most chart setups that means just beyond a recent swing low (for a long) or swing high (for a short), with a buffer for normal price noise, often around 0.5 to 2 times the Average True Range (ATR). Then size the position so that if the stop is hit, you lose a fixed small slice of your account, such as 1%.
This is trading education, not financial advice. Trading carries a real risk of loss.
What a stop-loss actually is
A stop (or stop-loss) order is an instruction to exit once price reaches a level you set. As the SEC's investor education site explains, when the stop price is reached, a stop order becomes a market order. A market order doesn't guarantee the execution price, so in a fast move or a gap you can be filled worse than your stop.
A stop-limit order becomes a limit order instead. It protects the price but may not fill at all in a fast drop, which makes it riskier as a protective stop. A trailing stop follows price by a set distance as the trade moves in your favour.
Rule 1: place it where you're wrong
Every setup has a point that invalidates it. In an uptrend pullback, the idea is that buyers defend the higher low. If price breaks below that swing low, the idea has failed. So the stop goes below the swing low, not at an arbitrary "5% down".
Ask: "At what price would I admit this trade was a mistake?" That's your stop zone.
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Rule 2: give it room for normal noise
A stop placed inside normal movement will be hit by random wiggles. The ATR (standard setting 14 periods) measures how much a market typically moves per period. Many traders place stops at least 1 to 2 ATR beyond their entry level or beyond the swing point. For a pullback entry, a buffer of about 0.5 to 1 ATR below the swing low is a common starting point.
If the stop that respects both rules is very wide, that's information: either reduce size or skip the trade.
Rule 3: let the stop decide the position size
This is where most beginners go wrong. They pick a position size first, then squeeze the stop to fit. Do it the other way round:
Position size = (Account × Risk %) ÷ (Entry price − Stop price)
Example: a £10,000 account risking 1% = £100. You want to buy at £250 with a stop at £240. Risk per share = £10. Position size = £100 ÷ £10 = 10 shares (a £2,500 position). If the stop is hit, you lose about £100 plus costs.
A wider stop means fewer shares; a tighter stop means more. Your confidence doesn't enter into it.
Rule 4: never move it further away
Moving a stop away from price "to give it room" turns a planned small loss into an unplanned large one. You may move a stop towards profit (trailing it under each new higher low), never away. Write it on a card by your screen: "Never move a stop away. Never average down."
Rule 5: set daily and weekly limits too
A single stop protects a trade. Limits protect the account. A simple set from our book: risk 1% per trade, stop trading for the day after losing 2 to 3R (R = the amount risked per trade), and stop for the week after losing 5 to 6R, then review your journal.
Common stop-loss mistakes
- Round numbers. Everyone puts stops at £100.00; place yours beyond the real swing point instead.
- Too tight to feel safe. A stop inside the noise just guarantees small losses.
- No stop at all. "I'll watch it" is how a small loss becomes a disaster.
- Stop-limit as protection in fast markets. It may never fill.
Key takeaways
- Put the stop where the trade idea is proven wrong.
- Add a buffer for normal noise using ATR.
- Size the position from the stop so a loss is about 1% of the account.
- Only ever move a stop towards profit.
- Use daily and weekly loss limits as well.
Our book Chart Edge sets out five complete strategies, each with entry, stop, target and "don't trade" rules, plus a position-size calculator to build. It's education, not financial advice. For other topics, browse Asendify's library of practical playbooks.
FAQ
Does a stop-loss guarantee my maximum loss?
No. A standard stop becomes a market order once triggered, so in a gap or a fast market the fill can be worse than your stop price.
Should I use a percentage stop like 5%?
A fixed percentage ignores the chart and the market's volatility. Use the invalidation point plus an ATR buffer, then let position size control the money at risk.
What is a trailing stop?
A stop that follows price by a set distance as the trade moves your way, locking in part of the gain while letting the trade run.
More playbooks on other topics: https://www.asendify.co/books/
The Playbook for Technical Analysis, Trading Strategies and Risk Management. £304.50 one-time, instant download.