Managing Trades: When You Have to Stop
A stop-loss order is an automated instruction to close a trade once losses reach a predetermined price level. It is attached specifically to an open position and remains active only for as long as that position is open. A trader typically sets the stop-loss when entering the trade or later, as part of their risk management.
If you mistakenly placed a small stop-loss too close to the entry point—hoping to keep losses under control and avoid large drawdowns—you might consider a different approach. One option is to enter trades only when there is confirming news. Alternatively, you can wait for a clear technical signal.
If a technically justified stop-loss ends up being too far from the entry point, it may still be triggered by what many novice traders jokingly call "a bit of profit, but a huge stop-loss." A stop-loss must be considered when trading currency pairs, highly volatile crypto assets, gold, indices, and commodities.
On the other hand, stop-loss orders are rarely used when trading stocks or ETFs in markets with strong liquidity.
What is a stop-loss?
A stop-loss order is an automated instruction to close a trade once losses reach a predetermined price level. It is attached specifically to an open position and remains active only for as long as that position is open. A trader typically sets the stop-loss when entering the trade or later, as part of their risk management. In automated trading, programmed algorithms ensure that stop-losses are applied accurately and on time.
It’s crucial to understand that the core purpose of a stop-loss is not to exit every time the market moves slightly against your position. Unfortunately, many beginners adopt an overly cautious mindset, reacting to minor fluctuations by prematurely closing trades—an approach sometimes referred to as "anti-scalping." This behavior undermines the potential of even the most robust strategies and can result in a string of small, unnecessary losses, whether in short-term speculation or long-term investment.
Even when market analysis is sound and the trader has correctly identified market sentiment, the price is under no obligation to immediately move in the desired direction. A trade must be given room to breathe—both in terms of price movement and time. Temporary fluctuations, or “market noise,” are normal and do not invalidate the overall trading idea.
If a trader fails to account for this natural volatility—imagine it like ripples on water overlaid on larger waves—even a solid strategy can lead to unnecessary losses. This, in turn, can lead to heightened stress and emotional trading, eroding the calm, rational mindset essential for long-term success.
A stop-loss should only be triggered in cases of truly adverse market behavior—when price action decisively contradicts the original trading plan. In this sense, a stop-loss acts as a last-resort safeguard, protecting the trader from uncontrolled losses if the market moves clearly and significantly in the wrong direction.
A well-planned trade, based on classical technical or fundamental analysis, will typically have a stop-loss positioned much closer to the entry point than the take-profit level. This ensures that the potential reward outweighs the risk. Ideally, entry occurs near a well-defined technical signal—such as a support level for long positions or a resistance level for shorts. This proximity allows the stop-loss to be placed just beyond these key zones, minimizing downside without compromising the trade’s potential.
However, if the entry point is made emotionally or at a poor level—far from any logical price structure—then the stop-loss must be set wider, exposing the position to unnecessary risk. Proper timing and precise execution are therefore essential to effective stop-loss placement.
How to Alter a Correct Stop-loss
If you mistakenly placed a small stop-loss too close to the entry point—hoping to keep losses under control and avoid large drawdowns—you might consider a different approach. One option is to enter trades only when there is confirming news, such as a key macroeconomic release or a corporate earnings report. Alternatively, you can wait for a clear technical signal, for example, one of the setups described in the article "How to Increase the Winrate in Trading."
Both approaches—using fundamental confirmation or technical validation—offer distinct advantages. Most importantly, they increase the probability that the price will move in the desired direction, thereby reducing the likelihood of an adverse move that could trigger your stop-loss—something every trader naturally wants to avoid.
Of course, an unfavourable outcome may still occur due to unexpected events, a sudden shift in market sentiment, or a missed detail in the analysis. Even in these cases, however, there is a second key advantage to this approach: the loss from a triggered stop-loss will likely be much smaller than the profits from successful trades where the plan worked out as expected.
This method helps to maintain overall profitability, even in strategies where the number of winning and losing trades is roughly equal—a scenario that is quite common, especially for less experienced traders.
What Happens If a Trade Is Opened Far from an Optimal Entry Point?
If a trader misses the ideal entry point or lacks the skill to identify it accurately, the stop-loss must be set further away from the opening price to avoid being triggered by normal market noise. When done correctly, the stop-loss should still be placed below the nearest strong support level (for long trades) or above the nearest strong resistance level (for short trades), so it won’t be activated during a routine retest of that key level—something that must almost always be anticipated.
However, if a technically justified stop-loss ends up being too far from the entry point, it may still be triggered by what many novice traders jokingly call "a bit of profit, but a huge stop-loss." From a professional standpoint, this reflects a poor risk-to-reward ratio, where the potential loss outweighs the expected profit if the stop-loss is hit.
Why Planning a Stop-loss Is Essential
Discussing a stop-loss at the start can feel uncomfortable. After all, nobody likes thinking about scenarios where the market moves against us and we’re forced to accept a loss. However, ignoring this issue—or failing to prepare for a negative outcome—will eventually lead to feelings of helplessness and frustration when things go wrong. Once the market is already moving against you, making rational decisions becomes much harder under stress. This is exactly why it’s crucial to set your stop-loss level before entering a trade. You can delay setting your profit target, but never your stop-loss.
A stop-loss must be considered when trading currency pairs, highly volatile crypto assets, gold, indices, and commodities.
On the other hand, stop-loss orders are rarely used when trading stocks or ETFs in markets with strong liquidity—and there are many reasons for this approach, which we’ll discuss separately.
In the meantime, it’s important to emphasise that in the vast majority of trades across most markets—especially in currencies—it is absolutely vital to plan a clear and rational method for minimising losses if the price starts moving against you. As any professional trader will tell you: don’t do it too early—but definitely not too late either.
