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10 Tips for Setting a Stop Loss
1. Percentage-Based Stop Orders:
This is the most common type. Traders set a stop-loss at a predefined percentage from their entry point. For example:
• 1–3% for more conservative traders or those with larger accounts.
• 5–10% for more aggressive traders or those with smaller accounts.
2. Volatility-Based Stop Orders:
Some traders use an asset’s volatility to set stop-losses. The Average True Range (ATR) is a common tool for this. For example, a trader may place a stop-loss at 2x ATR below the entry point for a long position.
3. Technical Analysis-Based Stop Orders:
Technical traders may set stop-losses at specific levels based on chart patterns or indicators—like below a major support level or a moving average.
4. Time-Based Stop Orders:
If a trade doesn’t move in the desired direction after a certain period, the position is closed.
5. Dollar-Based Stop Orders:
Some traders decide how much absolute dollar amount they’re willing to risk on a trade, rather than using percentages.
6. Be Consistent:
Whatever method or percentage you choose, apply it consistently.
7. Always Use a Stop-Loss:
Almost all successful traders emphasize the importance of always using a stop-loss.
8. Avoid Moving Your Stop-Loss:
It’s generally not recommended to move your stop-loss further away after entering a trade. Doing so can lead to bigger losses than initially planned.
9. Review and Adjust:
If you find yourself getting stopped out too often before the trade moves in your predicted direction, you might need to adjust your strategy or stop-loss levels.
10. Consider the Big Picture:
Loss management is important, but always look at the potential profit of the trade as well. If the potential return is much smaller than the risk, the trade may not be worth it.