Where Should Your Stop Loss Go?
Place your stop at a price that shows the trade idea did not work, then choose a position size that limits the possible loss.
10 min read
Put your stop loss at a price that shows your trade idea did not work. If you buy because price bounced from support, the stop usually goes below that support and the recent low. If you sell because price turned down from resistance, the stop usually goes above that resistance and the recent high.
Do not choose a stop only because it gives you a small loss. Do not use the same percentage on every chart. The course lesson on stop loss and take profit explains the basic idea. Here, we will use it on four different charts.
Your Stop Needs a Reason
Every trade starts with a reason. You may buy because support held. You may buy because price broke above resistance. You may sell because a downtrend continued after a short rally.
Put the stop where that reason is no longer true. If price reaches the stop, the setup did not work this time. That does not mean the original idea was foolish. It means you followed the exit you planned.
“I only want to lose $50” does not tell you where the stop belongs. First use the chart to find the stop price. Then choose a position size that keeps the possible loss within your limit.
Four Setups, Four Different Stops
1. A long trade from support
Price has bounced several times between $98 and $100. It returns to this area and rises again. You buy at $103. A stop at $102 is close to your entry, but price could touch it while the $98 to $100 support area still holds.
A stop at $99 also sits inside the support area. A better place may be below the area and below the recent low, perhaps near $96. If price falls through that point, the bounce from support has failed.
2. A short trade from resistance
Price is falling over time, but it rallies back to resistance near $75. It then turns down, and you sell at $73.50. The stop belongs above the resistance area and the recent high. It should not sit exactly on the $75 line.
Support and resistance are areas, not exact prices. A small move above $75 does not always mean the idea has failed. The course lesson on support and resistance is important here. It explains how to tell a real break from a normal test of a level.
3. Price falls below support and comes back
Support has held near $50 several times. Price drops to $47, but the candle closes back above $50. The next candle also stays above $50. You buy at $52 because sellers failed to keep price below support.
A stop just below $50 does not make sense. Price has already moved below that line once. The stop should be below the $47 low. If that stop is too far from the entry, do not force it closer. Skip the trade instead.
4. A chart with no clear stop
Price is moving sideways between $95 and $102. The candles overlap and there are several small lows. One strong green candle appears at $104, but there is no clear support level or recent low for a stop.
A stop at $101 would sit inside the messy price action. A stop at $94 would be far away, with little room left before the next resistance. There is no clever stop that fixes this chart. The better choice is to skip the trade.
Place the Stop
Four setups that test whether your stop protects the chart idea or only your feelings.
1 of 4
Price bounces from a support zone between $98 and $100. You enter long at $103. Which stop best matches the trade idea?
Use a Smaller Position With a Wider Stop
Stops will not be the same distance on every chart. One trade may need $2 of room per share. Another may need $5. The second trade does not need to risk more money.
Suppose you are willing to risk $100. With a $2 stop distance, the calculated size is 50 shares. With a $5 stop distance, it is 20 shares. The stop fits each chart while the total planned loss remains $100.
The course lesson on position sizing shows this calculation. Use this order: find the setup, place the stop, and then choose the size. If you choose the size first, you may put the stop in the wrong place just to make it fit.
Write the Reason Before You Enter
Before a practice trade, finish this sentence: “My stop goes here because my trade idea is wrong if...” If you cannot give a clear reason from the chart, the stop is probably random. The setup may not be clear enough to trade.
Next, calculate the position size from the stop distance. Do not move the stop farther away just because you do not want to take the loss. The trade has become weaker, but you are choosing to risk more.
Practice on several historical charts without placing a trade. Mark an entry and a stop. Then explain why the trade idea is wrong at the stop. Every line should have a clear reason.