Properly setting stop losses is what we have learned from system development. We use stop losses for one reason, and it is just this one reason—to protect us when the system fails. The system will always fail; if this potential tendency did not exist, there would be no need to use stop losses. Stop losses are our shield of defense, protecting us from the unpredictable influences of the system and the market.
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Trading is a game that involves too many unpredictable movements, so if the stop loss point is too close, it will hurt you. In fact, the closer your stop loss point is, the more likely the market will breach these stop loss points; the more times you are stopped out, the more paranoid you will become. Among the traders I know, no one can predict market movements with absolute precision (due to the random movement of prices), so our stop loss points must also be placed outside the areas of past random price fluctuations. They must be placed far enough away so that if they are triggered, it is due to real market movement, not influenced by random movement.
