The Purpose of Stop Losses
A stop loss is a predetermined exit point where you admit your trade thesis was wrong and exit the position. Stop losses serve three critical functions: limiting losses, managing emotions (you commit to an exit before entering), and enabling proper position sizing (you calculate how much to risk based on stop distance).
Three Stop Loss Placement Strategies
1. Technical Stop Losses (Most Common) - Place stops logically based on chart support/resistance levels. If price closes beyond your logical support, your thesis is wrong.
2. Percentage-Based Stops - Place stops at a fixed percentage below entry (e.g., 2% for equities, 1-2% for forex). Simple but less precise than technical stops.
3. ATR-Based Stops - Use Average True Range (volatility) to set stops. Higher volatility = wider stops. This adapts to market conditions automatically.
The Order Block Stop Loss
In SMC trading, the ideal stop placement is just beyond a logical order block:
- If trading LONG, place stop just below the most recent lower low (demand zone)
- If trading SHORT, place stop just above the most recent higher high (supply zone)
- This placement is logical - if price breaks these levels, you're wrong
- It prevents being stopped out on minor pullbacks
Avoiding Stop Hunting
Smart money deliberately creates wicks to hunt retail stops. To avoid this:
- Don't place stops at round numbers: 1.2500, 1.2600, etc. Everyone puts stops there
- Add buffer beyond levels: If support is at 1.2450, place stop at 1.2430 (add 20 pip buffer)
- Use wider stops: Wider stops survive the wick hunts and give your trade room to breathe
- Use mental stops: In highly volatile markets, consider mental stops instead of hard stops to avoid being hunted
Stop Loss Width Guidelines
Scalp Trades: 15-30 pips (tight stops, quick entries/exits)
Day Trades: 30-60 pips (balanced stops, same-day exits)
Swing Trades: 60-150 pips (wider stops, multi-day holds)
Longer-term Trades: 150+ pips (very wide stops, weeks/months)
The Risk-Reward Calculation
Your stop loss width directly determines your position size and risk-reward:
- Wider stop = Smaller position size = Lower RR ratio potentially
- Tighter stop = Larger position size = Higher RR ratio potentially
- The key is finding the logical stop based on your setup, then sizing accordingly
- Never tighten stops to improve RR numbers – this violates the logical stop placement principle
Moving Stops: Best Practices
When to move stops tighter (in your favor):
- After trade moves 50%+ in your favor (move stop to breakeven)
- After trade moves 100%+ in your favor (move stop to 50% of profit)
- This "locks in" gains while letting winners run
When NOT to move stops (key mistakes):
- Never move stops WIDER when losing – this doubles down on bad trades
- Never move stops to breakeven "just in case" – accept the loss if thesis breaks
- Never keep moving stops hoping trade recovers – emotional trading destroys accounts
Real-World Stop Loss Example
EUR/USD setup on daily chart: - Support at 1.2450 (previous order block) - You want to enter LONG at 1.2480 (pullback into support) - Your stop should be at 1.2430 (20 pips below support) - Your target is 1.2600 (previous resistance) - Risk: 50 pips ($500 with 0.5 lots) - Reward: 120 pips ($1,200 with 0.5 lots) - Risk/Reward: 1:2.4 (excellent) - Trade executed with hard stop at 1.2430
FAQ
A: Hard stops are safer (prevents emotion from overriding exits). Mental stops for experienced traders who can execute discipline. Beginners should use hard stops.
A: 15-20 pips minimum for major pairs. Tighter than that gets stopped out by normal volatility too often, reducing your win rate artificially.