Stop loss placement is one of the most important skills a trader can develop. Placing your stop too tight means getting stopped out of good trades. Placing it too wide means taking unnecessary losses. In this guide, we will cover proven strategies for placing stops that protect your capital while giving your trades room to work.
Why Stop Loss Placement Matters
A stop loss is your safety net. It automatically closes your position when the price moves against you by a certain amount. But where you place that stop makes all the difference between a successful trading career and a short one.
Key principle: Your stop loss should be placed at a level where your trade idea is proven wrong, not just at a random dollar amount you are willing to lose.
The Five Main Stop Loss Placement Methods
1. Support and Resistance Based Stops
This is the most common and often most effective method. You place your stop just below support for long trades or just above resistance for short trades.
Example - Long Trade
Stock XYZ is trading at $50 with strong support at $48.
- Entry price: $50.00
- Support level: $48.00
- Stop loss: $47.80 (slightly below support)
- Risk per share: $2.20
If the stock drops below $48, your support thesis is broken and the stop triggers.
2. ATR-Based Stops
Average True Range (ATR) measures how much a stock typically moves. Using ATR helps you set stops that account for normal volatility.
Example
Stock ABC has a 14-day ATR of $2.50 and is trading at $100.
- Entry price: $100.00
- ATR: $2.50
- Stop loss: $100 - (1.5 x $2.50) = $96.25
- This gives the stock 1.5 times its normal range to move
3. Percentage-Based Stops
Simple and straightforward. You risk a fixed percentage of the stock price on each trade.
- Tight stop: 2-3% for day trading or scalping
- Standard stop: 5-7% for swing trading
- Wide stop: 10-15% for position trading
4. Moving Average Stops
Place your stop just below a key moving average that is supporting the trend.
- Day traders often use the 9 or 20 EMA
- Swing traders use the 50 SMA
- Position traders use the 200 SMA
5. Chart Pattern Stops
When trading breakouts or chart patterns, place your stop at the level that invalidates the pattern.
Example - Breakout Trade
A stock breaks out above a $50 resistance level.
- Entry: $51.00 (after breakout confirmation)
- Stop: $49.50 (below the breakout level)
- If price falls back below $50, the breakout failed
Common Stop Loss Placement Mistakes
Avoid these errors that cost traders money:
- Placing stops at round numbers: Everyone places stops at $50 or $100. Market makers know this and often trigger these stops before reversing.
- Too tight stops: Not giving the trade enough room to breathe results in being stopped out of winning trades.
- Too wide stops: Risking too much on a single trade can devastate your account.
- Moving stops further away: If you move your stop to avoid getting stopped out, you are not following your plan.
- No stop at all: Hope is not a strategy. Always have a stop.
Position Sizing Based on Stop Distance
Your stop loss placement determines your position size. Here is the formula:
Position Size = (Account Risk) / (Stop Distance)
If you have a $50,000 account, risk 1% ($500), and your stop is $5 away, you can buy 100 shares.
Tips for Better Stop Placement
- Add a buffer: Place stops slightly beyond obvious levels to avoid stop hunts
- Consider volatility: Wider stops for volatile stocks, tighter for calm ones
- Check the chart: Look left to see where price has bounced before
- Use multiple timeframes: Check support on both your trading timeframe and one higher
- Backtest your method: See how your stop strategy would have performed historically
When to Move Your Stop Loss
Once your trade is profitable, you can move your stop to reduce risk. But follow these rules:
- Only move stops in your favor, never against
- Wait for new support levels to form before moving
- Consider using trailing stops for trending markets
- Lock in profits by moving stop to breakeven after the trade moves 1R in your favor
Track Your Stop Loss Performance
Pro Trader Dashboard analyzes your trades to show how often you get stopped out, your average loss size, and whether your stops are too tight or too wide.
Summary
Good stop loss placement is about finding the balance between protection and giving your trade room to work. Use technical levels, volatility measures, or chart patterns to place logical stops. Avoid round numbers and always size your position based on your stop distance. Master this skill and you will protect your capital while maximizing your winning trades.
Ready to learn more? Check out our guide on trailing stop strategies or learn about ATR-based stop placement.