Level 3 — Becoming a Better Trader
Stop-losses and invalidation
5 minute read
When the original idea no longer holds
Illustrative example · not live data
An idea depends on support
Support breaks
Stop order may trigger
A stop-loss is an automatic order that sells your position if the price falls to a level you choose. It's your safety net — it caps the damage when a trade goes wrong.
The right place for a stop is where your reason for the trade is proven wrong — 'invalidated'. If you bought because a support level should hold, your stop belongs below that support: if it breaks, your idea was wrong and you should be out.
Placing stops too close is a common mistake — normal price wiggles knock you out before the trade has a chance. Placing them at a logical level and sizing the position so the loss is affordable is the professional approach.
Never move a stop further away to avoid a loss. Taking a small, planned loss is a good trade; hoping a bad trade recovers is how small losses become disasters.
Key points to remember
- A stop-loss caps your loss automatically
- Place it where your trade idea is proven wrong
- Too-tight stops get hit by normal noise
- Never widen a stop to avoid a loss