A stop loss strategy is the set of rules for where a stop goes, how big the position is and whether the stop ever moves. The stop is the price at which a trade is closed at a loss. A good one sits where the trade idea is wrong, not where the loss is comfortable, and the position size is then fitted to that distance.
In short
- Place the stop at the price where the trade idea fails, then size the position so that a loss at that price costs the dollars you chose. The stop sets the size, not the other way round.
- Three common placements are a fixed number of pips, beyond a swing high or low (structure) and a multiple of the average true range (ATR).
- A tighter stop allows a bigger position but is hit more often. A wider stop is hit less often and needs a smaller position. Neither is free.
- Moving a stop further away after entry turns a planned loss into an unplanned one. Moving it toward profit is a separate decision with its own rules.
- On a $10,000 Direct account at $100 risk, a 44-pip stop on EUR/USD allows 0.22 lots, and a 60-pip stop allows 0.16 lots.
What is a stop loss strategy?
A stop loss strategy answers four questions in advance: where the stop goes, how many dollars the loss will cost, what size that allows, and what you will do if price moves your way. Having the answers before the trade is what separates a plan from a hope.
The stop is an order held with the platform. When price reaches it, the position closes at the next available price. In a fast market that price can be worse than the stop, which is called slippage, so a stop limits the loss and does not fix it exactly. Plan for a little extra on volatile news.
The position-size side is covered in the Academy position sizing lesson. This guide covers the placement and the rules around it. The risk to reward ratio guide shows how the stop distance feeds the ratio.
Where should you place a stop loss?
Place it where the trade idea is shown to be wrong. For a buy, that is below a level price should not reach if the idea is right, such as a swing low. A stop placed at a convenient distance, with no link to the chart, is just a number.
| Method | How it works | Strength | Weakness |
|---|---|---|---|
| Fixed pips | The same distance on every trade, such as 20 pips | Simple to apply | Ignores the pair's volatility and the chart |
| Structure | A few pips beyond a swing low (buy) or high (sell) | Tied to the idea, has a logic | Can be wide, and swing levels attract stop runs |
| ATR | A multiple of the average true range, such as 1.5 x ATR | Adapts to volatility | The multiple is a choice, and it ignores the chart |
The average true range (ATR) is the average size of a candle's full range, including gaps, over 14 candles by default. If the 4-hour EUR/USD ATR is 40 pips, a stop of 1.5 x ATR is 60 pips, which is wide enough that normal swings should not touch it. Many traders combine methods: take the structure level, check it against the ATR and skip the trade if the stop is unreasonably far.
How do you size a trade from the stop?
Divide the dollars you are prepared to lose by the stop distance in pips to get the dollars per pip. Divide that by the value of a pip on one lot to get the lots, and round down. The same dollar risk gives different sizes for different stops.
Take a $10,000 Direct account risking 1% per trade, which is $100, on a buy of EUR/USD at 1.0870. One standard lot of EUR/USD is worth $10 a pip.
| Stop | Distance | Lots for $100 | Pip value | Risk |
|---|---|---|---|---|
| Fixed 20 pips (1.0850) | 20 pips | 0.50 | $5.00 | $100.00 |
| Structure, swing low at 1.0830 (1.0826) | 44 pips | 0.22 | $2.20 | $96.80 |
| ATR, 1.5 x 40 pips (1.0810) | 60 pips | 0.16 | $1.60 | $96.00 |
The fixed 20-pip stop looks good because it allows 0.50 lots, but it sits inside the normal range of a candle on this pair, so it is hit often. The structure stop is where the idea fails. The ATR stop is the widest and the smallest in size. The risk in dollars is nearly the same in all three, and what changes is how often the stop is hit and how much a win pays per pip.
What are trailing and breakeven stops?
A trailing stop follows price at a set distance as the trade moves in your favour, locking in some profit. A breakeven stop moves the stop to the entry price once the trade is ahead by a set amount. Both limit the loss on a winner turning, and both can cut a winner short.
Rules for moving a stop should be fixed in advance. For example: move to breakeven after the trade reaches 1R of profit, then trail below each new higher low. Be aware of the cost. A breakeven stop at 1R is often hit by an ordinary pullback, turning a trade that would have reached 2R into zero. Test it with your records before you adopt it.
Never move a stop further from the entry. That is the one change that breaks the arithmetic of the plan, because the dollar risk you sized for is no longer the dollar risk you have. The revenge trading guide shows how that habit grows after a loss.
What does a stop loss strategy look like with real numbers?
This example uses the structure stop from the table. A $10,000 Direct account, EUR/USD at 1.0870, risking $100. The prices are made up for teaching.
- The 4-hour chart is rising, with a swing low at 1.0830. A pullback ends at 1.0870 and a candle closes back up.
- The stop goes at 1.0826, 4 pips below the swing low. The risk is 44 pips.
- The ATR of 40 pips gives a 1.5 x ATR stop of 60 pips. The structure stop is shorter than that, so it is accepted.
- Size: $100 / (44 x $10) = 0.227 lots, rounded down to 0.22. A pip is $2.20, so the risk is 44 x $2.20 = $96.80.
- The target is 1.0958, twice the stop distance, 88 pips away. That is worth 88 x $2.20 = $193.60, a ratio of 2 to 1.
- When price reaches 1.0914, 1R above entry, move the stop to breakeven at 1.0870, and trail below each higher low after that.
Now compare a trade where the stop is moved. Price falls to 1.0830, and the trader moves the stop to 1.0790 "to give it room". The risk becomes 80 pips x $2.20 = $176, 1.8 times the plan. If the trade does not recover, the loss is nearly double what the account was sized for. Simulated trades carry costs like a live account: a commission when a trade opens and closes, and holding costs on positions kept overnight.
How this works on CMC Funded
On a $10,000 Direct account the daily loss limit is 4% of the day's starting equity, which is $400 on the first day, and the maximum loss is a fixed 6%, so the floor is $9,400. Both are measured on equity, so a floating loss counts at every price. Reaching either ends the account, so the stop is the main thing between a bad trade and the end of the account.
The stop must sit well inside the limits. The $96.80 trade uses 24% of the daily limit, so four losses in a day would reach about $387 of the $400. A trade with no stop, or a stop moved wider, has no such bound. Without a stop a 100-pip move against 0.22 lots is $220 of floating loss, and it counts in full.
The Direct profit target is 10%, which is $1,000, with at least 3 trading days and no time limit. There is no reason to take wide risks to hit it quickly. On the Classic route the daily limit is 5% and the maximum loss 10%. Trading is simulated, with a commission and holding costs. Read the rules for the definitions, and use the position size calculator for the lots.
Common mistakes
- Choosing the stop to fit a size. The stop comes from the chart and the size follows.
- Placing the stop exactly on a swing low. Price often probes beyond a level, so leave a few pips.
- Using the same pip stop on every pair. A 20-pip stop is tight on a volatile pair and loose on a quiet one.
- Moving the stop further away. It turns a planned loss into a larger one.
- Moving to breakeven too early. An ordinary pullback then closes a good trade at zero.
- Trading with no stop. A floating loss counts against the daily and maximum loss limits in full.
- Forgetting slippage. In a fast market, plan for a fill a little past the stop.
Questions traders ask
Where is the best place for a stop loss?
Beyond the level that proves your idea wrong, with a few pips of room. A swing low or high is common. Check the distance against the ATR to make sure normal moves will not hit it.
What is a good stop loss in pips?
There is no fixed number. It depends on the pair, the timeframe and the setup. A 4-hour trade on a pair with a 40-pip ATR needs a stop of 40 to 60 pips, where a 5-minute trade might need 8 to 12.
Should I use a mental stop?
A stop held only in your head depends on you acting under pressure. A stop order on the platform closes the trade without you, so most plans use one. A mental stop leaves a gap that a fast move can fill with a large loss.
Does a wider stop mean more risk?
Not if the size is reduced to match. A wide stop with a small position and a tight stop with a large one risk the same dollars. What differs is how often the stop is hit and what a win pays per pip.
Next steps
The Academy position sizing lesson goes through the lot sum with practice questions. Read the drawdown guide for what a run of stopped trades does to an account, and the prop firm challenge mistakes guide for how oversized positions end evaluations. Use the position size calculator for each trade, and read the loss limits on the rules page.
You can compare the Classic and Direct routes on the challenges page.