What it means
Place it at structure (beyond the sweep or swing) or by volatility (ATR), not at an arbitrary amount. Stops only ever move towards profit.
In practice
A stop-loss defines the risk before the trade begins, which is what makes position sizing possible. It belongs at the price that shows the idea was wrong: below the low that should hold for a long, above the high for a short.
Placing it as an order at once removes the decision from the heat of the moment.
What to watch for
Moving a stop further away to avoid being stopped out is how small planned losses become large ones. Stops can also fill worse than their price in gaps and fast markets, and a mental stop that is never placed is not a stop.
Related terms
4 terms- Stop orderAn order that becomes a market order once price reaches your stop price.
- ATRWilder's measure of volatility: how far price typically moves per candle, including gaps. No direction.
- Position sizingChoosing your size so that your stop distance costs exactly your planned risk.
- Breakeven stopMoving your stop to your entry once a trade is in profit, so being stopped out costs about nothing instead of a full loss.