Category: Risk Guides

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

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

Common mistakes

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.

Many traders abandon a sound strategy after a handful of losses in a row, because a streak feels like proof that something is broken. Usually it is not. Streaks are a normal feature of random outcomes, and knowing how common they are is a practical part of risk management.

How likely is a losing streak?

If each trade loses independently with probability q, the chance of n losses in a row is q to the power of n. For a strategy that wins half its trades, five straight losses has a probability of 3.1% for any given set of five trades. That sounds rare, but over a series of trades there are many chances for a streak to start.

A strategy with a 40% win rate, which can be profitable when winners are larger than losers, will often produce ten losses in a row over a year of trading.

What streaks cost depends on position size

A streak is survivable or fatal depending on how much you risk per trade. Here are ten consecutive losses at different risk levels.

Why recovery is harder than the loss

Losses and gains do not cancel symmetrically. A 50% drawdown needs a 100% gain to get back to even. The deeper the hole, the steeper the climb.

What to do about it

Also judge a strategy on enough trades. A small sample says very little about whether an approach works, so review your journal over dozens of trades, not a handful.

The takeaway

You cannot avoid losing streaks, but you can decide how much they cost. Fixing your risk per trade, sizing from your stop, and tracking results over time keeps a normal run of losses from becoming an account-ending one.

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.

Most traders decide how much to buy by feel. Professionals do it the other way round: they decide how much they are willing to lose, and let the stop-loss determine the size. This guide shows the method, and why so many traders cap that risk at around 1% of the account.

The core idea

Position size is not about how much you want to own. It is about how much you will lose if you are wrong. Two inputs set that amount: your risk limit, and the distance between your entry and your stop.

The formula

For a short trade, use the absolute distance between entry and stop. The result is in units of the instrument: shares, coins or contracts.

Example 1: a stock

Position size = $100 / $5 = 20 shares, a position worth $2,000. If the stop is hit, you lose about $100, or 1% of the account. Buy 50 shares because the number feels right, and the same stop costs $250.

Example 2: a crypto trade

Account $10,000, risk 1% ($100), entry $64,200, stop-loss $61,800. The distance is $2,400, so position size = $100 / $2,400 = about 0.042 BTC, worth roughly $2,675. The position is far smaller than the account. Position value and risk are different numbers, and only risk should be fixed.

Why 1%?

The figure is a convention, not a law. It is popular because it keeps losing streaks survivable. Ten consecutive losses at 1% risk leave an account down about 9.6%. At 5% risk per trade, the same streak costs about 40%, and recovering that takes a 67% gain. Many traders use between 0.5% and 2%, depending on their strategy and experience.

Fees and slippage

Real losses are usually larger than the plan. Exchange fees, spreads and slippage add to the distance between entry and exit. Including a round-trip fee estimate gives a more honest size. In fast markets or overnight gaps, a stop may fill beyond its price, so treat your risk limit as a target, not a guarantee.

Leverage does not change the risk

Leverage lets you hold a larger position with less capital, but the formula is unchanged: risk is the size multiplied by the stop distance. What leverage changes is the margin you lock up and how close you are to liquidation. If a leveraged position can be liquidated before your stop is reached, the stop is not protecting you.

A short checklist

1. Choose your risk per trade as a percentage of the account.
2. Place the stop where the trade idea is clearly invalidated.
3. Calculate the size from the distance. Do not choose the size first.
4. Check that the position and margin fit within your account.
5. Record the trade so you can review your results.

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.