Stop-Loss Strategies

A defines exactly where you exit a losing trade. Too tight and normal market noise stops you out. Too wide and losses drag down performance.

Technical Stops

Technical stops sit at levels where the trade thesis breaks if price reaches them.

ATR-Based Stops

Average True Range (ATR) measures a stock's average daily price movement over the last 14 sessions. It captures the typical range from high to low each day, including gaps. A stock with ATR of $2.50 moves about $2.50 per day on average. Think of it as your volatility ruler.

ATR adapts your stop to each stock's volatility. A volatile stock (ATR $15) gets a wider stop than a calm one (ATR $2). This prevents one-size-fits-all errors where the same percentage stop is too tight for volatile stocks and too wide for calm ones.

Stop = Entry Price - (ATR x Multiplier)

The multiplier controls how much room you give the trade. Higher multiplier = wider stop = more room for normal fluctuations but larger risk per share.

Percentage and Time Stops

Trailing Stops

A moves up as price rises, locking in profits. It never moves down.

Start trailing only after the trade has moved in your favor, typically after reaching 1:1 risk-reward. This avoids early-trade noise.

The Mean-Reversion Exception

For mean-reversion strategies (like RSI-2, covered in Level 6), fixed stop-losses often trigger at maximum pessimism, right when the stock is about to bounce. Backtesting shows fixed stops reduce profitability for these strategies.

Mean-reversion alternatives: time-based exits, indicator-based exits (RSI threshold), or small position sizing as the risk control.

Hard vs Mental Stops

Use hard stops until you have proven you can honor exits consistently.

Pre-Entry Checklist