Where the stop belongs
The rule is to derive the stop from the chart rather than from the amount you would like to lose: place it beyond a level that invalidates the trade idea if broken — below the setup low when long, above its high when short. Placing it at a "psychologically comfortable" distance means ordinary movement takes it out, because it means nothing to the market.
The quantitative alternative derives it from volatility via ATR, so it widens in volatile markets and tightens in calm ones automatically.
What a stop-loss does not do
A stop-loss is a stop order: it becomes a market order once price reaches it. In a continuous market it fills near your level, but when the market gaps — Sunday evening or after a surprise release — it fills at the first available price beyond the gap, which can be far away. This is why disciplined traders reduce size before holidays and major events rather than relying on the stop alone.
A worked example
A gold long at 2,398 with tested support at 2,380. The stop goes at 2,370 — beyond support with a buffer — making the risk $28 per ounce. At 0.10 lots (ten ounces) the maximum loss is $280, a figure that should equal your predetermined risk percentage and no more.
Common mistakes with this term
- Moving the stop further away mid-trade, turning a defined loss into an open-ended one.
- Placing it at a comfortable dollar distance instead of a level that technically invalidates the idea.
- Relying on a "mental stop" executed by hand, a decision rarely taken in the difficult moment.