Lesson 2 of 6 · Risk & Position Sizing
Stop placement
A stop must mean something.
A stop placed at a round number or at whatever distance produces a tidy dollar loss is a random stop. It gets hit and the trade sometimes recovers immediately, which is the worst outcome. Put the stop where the trade is actually wrong, not where the loss feels manageable.
Stop just beyond the level.
The support level held several times. The stop loss sits just below it. A close under that floor means the buyers who held it are now underwater and the thesis broke.
Two methods that work.
Method one: place the stop just below the nearest support level on a long, or just above resistance on a short. A close through that level means the thesis is wrong. Method two: use ATR as a noise buffer. A stop at 1.5x the daily ATR below entry gives the trade room to breathe without giving away too much.
You buy a stock that just broke above resistance at $80. Where does the stop go?
Show the answer
A. Just below the $80 former resistance level. Former resistance that breaks often becomes support. A close back below $80 means the breakout failed.