You buy at $50 and decide, before the order goes in, that you will be out at $47. That decision is the stop loss, and making it before the position exists is what separates a $3 loss from an open-ended one.
Why a stop loss decides the size of your losses
An account that falls 20% needs a 25% gain to return to its starting balance. The gain is calculated on the smaller number. Fall 50% and you need 100%. The job of a stop is to keep every loss inside the range you can recover from.
A stop also moves the exit decision to the moment it is easiest to make. Choosing an exit while the position is falling means choosing between admitting the loss and hoping, and hope has no price attached to it.
Types of stop loss
Hard stop
A resting order at a specific price, which your broker executes without you. It runs whether or not you are at the screen, and it does not negotiate.
The cost is that a resting order fires on a touch. Price only has to reach your level once, on any wick, in any thin minute of the session, and you are out at whatever the fill is. A stop order becomes a market order when it triggers, so the fill can be worse than the level you set, which matters most on a gap.
Mental stop
A level you have written down and will act on manually. It cannot be triggered by a single wick, and it lets you apply judgement about how price arrived at the level.
The cost is that it depends entirely on you doing it, at the exact moment the trade is going against you. A mental stop you have hesitated on twice is not a stop.
If you are not certain which one you use, use the hard stop. It is the version that still works when your attention is somewhere else.
Trailing stop
A stop that moves in one direction only: up as price rises on a long, down as price falls on a short, never backwards. It converts an open profit into a floor under the trade.
Swingfolio supports two ways of calculating it. A percentage trail sits a fixed percentage below the highest close since entry. An ATR trail sits a multiple of Average True Range below that reference price, with presets labelled Tight (1.5 times ATR), Normal (2 times) and Wide (3 times), or a multiplier you type. You can also trail manually below each new swing low.
Where to place your stop loss
Place the stop at the price that says your reason for the trade was wrong. Four structural choices, each tied to a different reason for entering.
Below support. If you bought because price held a support level, a break of that level is the disproof. Put the stop below it with a buffer, not on it.
Below a moving average. If the 20-day moving average was your entry trigger, price closing through it removes the trigger. The average is acting as dynamic support here: it moves each day, so the stop moves with it.
Below the swing low. The most recent low that mattered. A break of it means the sequence of higher lows that defined the uptrend has ended.
Beyond the pattern. Above the right shoulder of a head and shoulders, below the boundary of a flag, beyond the opposite trendline of a triangle. The pattern defines its own invalidation.
ATR stops
Average True Range measures how far the stock has been moving per day, so an ATR stop scales the distance to the stock rather than to your preference.
The formula for a long is entry price minus ATR times a multiplier. Take an entry at $100 with a 14-day ATR of $3. At 2 times ATR the stop sits at $100 minus $6, or $94. The same trade on a stock with an ATR of $6 would put the stop at $88, and your share count has to fall to keep the dollar risk the same.
Raising the multiplier widens the stop and reduces how often ordinary movement takes you out. It also increases the loss when the stop is reached. There is no setting that avoids both.
Percentage stops
A fixed percentage below entry takes the least work to compute and carries the least information. It reflects nothing about where support sits, how volatile the stock is, or where the pattern breaks. Two stocks at $100 get the same $5 stop whether they move $1 a day or $6.
Use a percentage stop when you have no structure to work with. When the chart gives you a level, the level is the better stop.
Stop loss placement examples
Pullback entry
You bought a pullback to the 20-day moving average in an uptrend. Three candidates. Below the moving average itself is tight, and sits inside normal daily movement. Below the recent swing low respects the structure that defined the trend. Below the 50-day moving average is wide, and only works if the position is small enough to absorb it.
This article uses the swing low with a small buffer, because that is the level whose break changes the trend read.
Breakout entry
You bought a breakout above resistance. Below the breakout level itself is tight and gets hit on the ordinary retest of a broken level. Below the last swing low before the breakout is the structural choice. Below the whole consolidation range is wide, and turns a breakout trade into a position trade.
The midpoint of the consolidation is a reasonable compromise: far enough that a retest does not reach it, close enough that a failed breakout does not cost the full range.
Support bounce
You bought at horizontal support at $50. The stop goes below the level with a buffer for wicks. With a 3% buffer that is $48.50. Decide in advance whether you are exiting on a touch of that price or on a daily close below it, because the two produce different trades on the same chart.
Managing a stop loss after entry
Moving to breakeven
Once the trade has gained a full R, moving the stop to your entry price takes the planned loss off the table. It does not remove risk: an overnight gap can open below your stop and fill you underneath it. What it removes is the ordinary, intraday version of the loss.
The trade-off is that a stop at entry sits at a price the stock has already traded at, so a normal pullback closes the position for nothing. Move it there when a technical level has been cleared, not on a fixed schedule.
Trailing the stop
Four ways to trail. Below each new swing low. Below a moving average such as the 10-day or 20-day. A fixed ATR distance from the highest close. A fixed dollar amount or percentage below the highest price reached.
Worked through: you enter at $50 with the stop at $47, so 1R is $3. Price rises to $55 and forms a new swing low at $53. The stop moves to $52.50, just below that low. The position is now locked in at about 0.83R of profit, and each higher low that forms moves the stop again.
Tightening
Reasons to pull a stop closer: price is near your target, volume is falling away on the advance, your time stop is approaching, or the market as a whole has turned. Each of these is a reason the remaining upside has shrunk, which changes what the open risk is buying you.
Stop loss mistakes to avoid
- No stop at all. The position becomes a decision you make later, under pressure, with money on the line.
- Too tight. A stop inside the stock's daily range is not protection, it is a fee you pay for being right too early. ATR tells you what that range is.
- Too wide. A stop you would not accept losing is a stop you will move. Fix it with position size: fewer shares makes a wide stop affordable.
- Moving it away from price. Widening a stop as the trade goes against you converts a defined loss into an undefined one. Stops move in the favourable direction only.
- Placing it on the obvious level. Support is a price the stock has already traded down to, so a stop sitting exactly there is at a level the chart has reached before. Put it beyond the level, not on it.
- Cancelling it as price approaches. This is the same failure as the first one, arriving later.
Stop loss quick reference
| Entry type | Stop location | Note |
|---|---|---|
| Pullback to a moving average | Below the swing low | Structural placement |
| Breakout | Below the consolidation | Leaves room for the retest |
| Support bounce | Below the support level | Add a buffer for wicks |
| Reversal pattern | Beyond the pattern extreme | The pattern defines it |
| Momentum entry | 2 times ATR | Scales to the stock's own range |
The R-multiple concept
Your stop defines one unit of risk, written as R. Enter at $50 with the stop at $47 and R is $3. A $6 gain on that trade is 2R. A $3 loss is minus 1R. A $1.50 gain is 0.5R.
Working in R rather than dollars makes trades of different sizes comparable. A $600 win on a $300 risk and a $60 win on a $30 risk are the same trade, and only the R-multiple says so.
Measuring your stop discipline in Swingfolio
Setting a stop is one decision. Whether you honoured it, and whether it was placed where price could reach it for no reason, are questions your own trade history answers.
Swingfolio computes the worst adverse move and the largest favourable move on every closed trade from daily price history, and plots them as a risk and reward corridor. The corridor is cumulative. The top line totals what every trade would have returned had each exited at its peak. The bottom line totals what each would have returned at its low, and the middle line is what you took. The badge on the card gives the share of that peak total you captured. How far the worst-case line runs below the actual line is how much drawdown your positions sat through before exiting.
The What-If simulator answers the other half. Its exit-at-stop scenario replays every closed trade against the daily bars, finds the first day your stop was reached, and totals what the results would have been if you had taken every one. Comparing that against what you did is the measurement of whether your stops are rules or suggestions.
Set the stop on your next trade before you place the order, then check the corridor after ten closed trades. Start the 30-day trial.