Many traders choose a stop by asking 'how much am I willing to lose?'. That question belongs to position sizing. The stop itself should answer a different question: where is my trade idea proven wrong?
1. Structure stops
Place the stop beyond the swing low (for longs) or swing high (for shorts) that defines the setup, plus a small buffer for spread and noise. If price breaks that point, the structure you were trading has failed.
2. ATR stops
The Average True Range (ATR) measures recent volatility. A stop at 1.5 times the ATR of your entry timeframe adapts to quiet and busy markets automatically. It works well when the structure is unclear.
3. Time stops
If a trade has not moved in your favour after a set time (for example, two hours for an intraday breakout), close it. Momentum setups that do not work quickly often do not work at all.
Then size the position
Once the stop is placed by one of these methods, calculate the lot size so that the distance costs 0.5–1% of the account. Never move the stop closer just to trade a bigger size.
Moving stops
- Move to break-even only after price has moved at least 1R in your favour.
- Trail behind new swing points, not tick by tick.
- Never widen a stop once the trade is open.