4 Practical tips for placing your Stop Loss

Tip #1 Look for market structure (Support and resistance)
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Whenever you’re trading any setup, it’s always important to look at the previous market structure to see where the price might go next. ‌

It’s like looking at the road ahead while driving a car. By market structure, what I’m really talking about are levels of support and resistance. You’ll want to look at these levels to help you determine where to place your stop loss. If you’re trading a long setup, you’ll want to look for the previous level of support and put your stop loss just below it. If you’re trading a short setup, you’ll want to look for the previous level of resistance and put your stop loss just above it. ‌

Tip #2 Use the Average True Range (ATR)
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Another common method traders will use to set their stop loss is by using the Average True Range, or ATR. The average true range gives us an estimate as to how much we price expected to move by.‌

If an asset is very volatile, we would have a larger ATR.‌

If an asset does not move much, it will have a much lower ATR. ‌

You can probably already imagine how this will help us with setting our stop loss. The larger the ATR of the asset we are trading is, the wider we will need to place our stop loss to give us some breathing room. ‌

Many traders will recommend setting your stop loss for 1 or 2 ATRs from your entry. ‌

So if the ATR is 10 pips, you may set your stop loss at 10-20 pips from your entry. ‌

Tip #3 Determine your stop size based on your trading style
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Your stop loss will also be dependent on your trading style. Many day traders will follow the 1% rule. The 1% rule says that you will never risk more than 1 percent of your account value on a single trade. This does NOT mean that if you have an account with $20,000, you can only buy $200 worth of a stock. ‌

It means that you will take measures to make sure that you will not lose $200 on that one trade. So you may use your entire account to buy the stock, then set your stop loss at 1% from your entry so you can’t lose more than that. Not to say that’s what you should do, but technically you could and still obey the 1% rule. For swing traders, that number would be more around 2%. ‌

Tip #4: Raise your stop to breakeven as your trade comes into profit
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As your trade becomes profitable, you’ll want to move your stop to breakeven to prevent any losses. However, you also don’t want to move it too soon or too tight!‌

Markets can move sideways for a bit and even come back down before a trade really goes in your favor. It’s smart to lock in your profits by pulling your stop up to breakeven, but do make sure you’re giving the trade room to go your way.