One of the most frustrating experiences in trading is watching a winning trade turn into a losing one. You were up nicely, the trade was working perfectly, and then the market reversed and stopped you out for a loss. A break-even stop loss strategy can help you avoid this painful scenario while still giving your trades room to develop.
What is a Break-Even Stop Loss?
A break-even stop loss is when you move your stop loss order to your entry price after a trade moves in your favor. This means that if the market reverses, you exit the trade without losing any money (excluding commissions). You have essentially created a "free trade" where you can only win or break even.
The key concept: Once your trade is profitable enough, you move your stop loss to your entry price. This locks in a zero-loss outcome while allowing unlimited upside potential.
When Should You Move to Break Even?
Timing is crucial when moving your stop to break even. Move too early and you will get stopped out of good trades. Move too late and you risk giving back profits. Here are some common approaches:
1. Fixed Price Movement
Move to break even after the price moves a certain amount in your favor. For example, if you risked $1 per share, move to break even after the stock moves $1 in your favor (a 1:1 risk-reward).
Example
You buy stock XYZ at $50.00 with a stop loss at $49.00 (risking $1.00 per share).
- Stock moves to $51.00 (up $1.00)
- You move your stop loss from $49.00 to $50.00 (break even)
- Now you can only win or break even on the trade
2. Technical Level Approach
Move to break even after the price clears a significant technical level, such as a resistance point, moving average, or previous high. This approach respects market structure rather than using arbitrary price targets.
3. Time-Based Approach
Some traders move to break even after a certain amount of time has passed and the trade is profitable. For example, moving to break even at the end of the trading day if the trade is up.
The Benefits of Break-Even Stops
- Psychological relief: Knowing you cannot lose money on a trade reduces stress and emotional decision-making
- Capital protection: You preserve your trading capital for future opportunities
- Compound effect: Avoiding losses helps your account grow faster over time
- Confidence building: Having risk-free trades boosts your trading confidence
Common Mistakes to Avoid
While break-even stops are powerful, they can hurt your trading if used incorrectly. Here are the most common mistakes:
Moving to Break Even Too Early
This is the biggest mistake traders make. If you move your stop to break even after a tiny move, normal market fluctuations will stop you out constantly. You will have many break-even trades but miss the big winners that could have made your month.
Bad Example
You buy stock ABC at $100 with a stop at $98 (risking $2).
- Stock moves to $100.50 (up only $0.50)
- You move your stop to $100 (break even)
- Stock pulls back to $99.80, stops you out
- Stock then rallies to $108
You had the right idea but got stopped out of an $8 winner because you moved your stop too early.
Ignoring Market Volatility
A stock that moves $2 per day needs more room than a stock that moves $0.50 per day. Your break-even trigger should account for the volatility of what you are trading.
Using Break Even on Every Trade
Not every trade setup benefits from a break-even stop. Some strategies require giving the trade more room to work. Use break-even stops strategically, not automatically.
A Better Approach: The Partial Exit Strategy
Instead of moving your entire position to break even, consider taking partial profits and moving the remainder to break even:
- Enter your full position size
- When the trade reaches 1:1 risk-reward, sell half your position
- Move the stop loss on the remaining half to break even
- Let the rest run for bigger gains
This approach locks in some profit while still allowing you to catch larger moves. Even if the remaining position gets stopped at break even, you still made money on the first half.
How to Calculate Your Break-Even Point
Your true break-even point should include commissions and fees. Here is how to calculate it:
- Entry price: $50.00
- Commission to enter: $5.00
- Commission to exit: $5.00
- Shares: 100
- True break-even: $50.00 + ($10 / 100 shares) = $50.10
If you set your stop exactly at your entry price, you will actually lose the commission costs. Set your break-even stop slightly above your entry to account for fees.
Tracking Your Break-Even Stop Performance
To know if your break-even strategy is helping or hurting, track these metrics:
- How many trades get stopped at break even?
- How much would those trades have made or lost without the break-even stop?
- What percentage of your break-even stops would have become winners?
If most of your break-even stops would have been winners, you are moving your stop too early. If most would have been losers, your strategy is working well.
Track Your Stop Loss Strategy
Pro Trader Dashboard helps you analyze your stop loss performance. See how often you hit break even, get stopped out, or catch big winners. Use data to improve your exit strategy.
Summary
Break-even stop losses are a valuable tool for protecting your trading capital and reducing stress. The key is timing: move your stop too early and you will miss winners, move it too late and you risk unnecessary losses. Start with a 1:1 risk-reward trigger, track your results, and adjust based on the data. Combined with a partial profit strategy, break-even stops can significantly improve your trading consistency.
Want to learn more about risk management? Check out our guide on ATR-based stop losses or learn about risk-reward ratios.