- A stop-loss marks where your trade idea is wrong, so it also sets your size.
- ATR stops adapt to volatility; percentage stops ignore it.
- Never widen a stop after entry, and never pick the stop to fit the size.
A stop-loss is the price at which you accept that a trade idea was wrong. Placing it well matters twice: it limits your loss, and because position size comes from the stop distance, it determines how large your trade can be. There is no universal best method. These are the three most common approaches and their trade-offs.
The three methods
1. Percentage
A fixed distance below entry, such as 2% or 5%. Simple and consistent, but blind to how much the market normally moves.
2. ATR (volatility)
A multiple of the Average True Range, often 1.5 to 3 times. Adapts to current volatility, but the multiple is a judgment call.
3. Structure
Beyond a swing low or support area. Tied to a reason, but the distance can be large, forcing a smaller position.
Percentage stops
A fixed percentage below (or above, for shorts) your entry. It is simple, consistent and easy to calculate. The weakness is that it ignores how much the market normally moves. A 2% stop is generous on a quiet stock and far too tight on a volatile altcoin, where ordinary noise can trigger it.
Volatility stops (ATR)
Average True Range (ATR) measures the typical price movement over a period, commonly 14 candles. An ATR stop places the stop a multiple of that range away from entry.
The strength is that it adapts to current volatility. The weakness is that the multiple and the period are choices that change the result, and it says nothing about where the trade idea actually fails.
Structure stops
The stop sits beyond a recent swing low or high, or beyond a support or resistance area, so that it is hit only if the market structure behind the idea breaks. Many traders add a small buffer beyond the level to avoid brief wicks. The distance can be large, which forces a smaller position.
Comparing the three
| Method | Based on | Best suited to |
|---|---|---|
| Percentage | Fixed distance | Simple, rules-based routines |
| ATR | Current volatility | Instruments whose volatility changes a lot |
| Structure | Chart levels | Setups with a clear invalidation point |
Common mistakes
Fitting the stop to the size
Moving the stop closer so you can hold more defeats the purpose. Set the stop first, then size the trade.
Widening after entry
This increases your loss beyond what you planned and turns small losses into large ones.
Ignoring costs
Spreads and fees make the real loss larger than the stop distance.
Also remember that a stop does not always fill at its price. In fast markets or gaps, execution can be worse than planned.
Putting it together
Whichever method you use, the process is the same: decide where the idea fails, measure the distance to that price, and size the position so a stop-out costs only your planned risk. Writing down your stop rule in advance, and recording each trade, makes it easier to see which method actually works for you.
This article is for education only. It is not financial advice or a recommendation to buy or sell any asset. Trading involves a high risk of loss.