Where the stop goes

A stop loss is the price where you admit the trade idea was wrong and get out. It turns the risk you chose in the last lesson into an actual order. Without one, your risk per trade is just a wish.

There is no perfect place for a stop. But there are better and worse ways to choose it, and a few rules that hold no matter which setup you trade.

Structure-based or fixed-point

A structure-based stop goes where the chart says your idea is wrong. That might be just past a recent swing high or low, or past the candle that gave you the signal. If price gets there, the reason for the trade no longer holds.

A fixed-point stop uses the same distance every time, such as 15 points from entry. It is simple and makes sizing easy. The downside is that the market does not know your number. Sometimes 15 points is too tight for the day's movement, and sometimes it is far too loose.

Many traders blend the two. They place the stop at structure, then check that the distance fits their risk. If it doesn't, they size down or skip the trade. You will see how in the next lesson on position size.

Hard stops and trailing stops

A hard stop is a stop order that sits at the broker or exchange from the moment you enter. It protects you if your platform freezes, your internet drops, or you freeze. I think every trade should have one.

A trailing stop moves in your favor as the trade works. It never moves back. It is a way to protect part of a gain without guessing the top.

Here is one example from my own setup. I use three exits. The hard stop sits at the far edge of the signal candle. The trailing stop follows the previous candle's high or low. And I am flat by the end of the session, no matter what. That is one way to do it, not the only way. What matters is that each exit has a clear rule.

Never widen a stop

You can move a stop to reduce risk. You should never move it to add risk. Widening a stop because price is getting close is the trade-saving move that sinks accounts.

When you widen a stop, your planned $40 loss quietly becomes $80, then $120. You also stop learning anything, because the trade no longer matches your plan. If you feel the urge, it usually means the stop was in the wrong place to begin with. Note it in your record and fix the rule later, not mid-trade.

Slippage on stops

Most stop orders become market orders when price touches them. In a fast market, the fill can come a few ticks past your stop price. That gap is called slippage. On one MNQ contract, each 0.25-point tick is $0.50, so four ticks of slippage adds $2 to the loss.

Slippage tends to be worse around big news and at the open. Plan for a little of it in your risk number. If you want a refresher on stop orders, see Order types.

The takeaway

Put your stop where your trade idea is proven wrong, or at a fixed distance you have tested, and make it a real order. A trailing stop can protect gains as a trade works. Never widen a stop, and expect some slippage when it fills.

Do this today

• Write down where your stop goes for your setup, in one sentence.
• Check that your platform places a hard stop with every entry, not after.
• Look back at your last five losing trades and note whether any stop was moved.
• Add a few ticks of slippage to your planned loss per trade.

Check yourself

Answer each one in your head, then open it to check.