What a stop loss is really for

Most new traders set a stop by asking "how much can I stand to lose?" That's the wrong question. The right one is: where would price have to go to show my idea was wrong?

Say you buy gold because price pulled back to an area where buyers stepped in twice before. Your idea is "buyers will defend this area again". If price falls clearly through that area, the idea has failed. Your stop belongs just beyond it, not at a round number that happens to feel comfortable.

Once the stop is in the right place, you control the money at risk with position size, not with the stop. A wide stop simply means a smaller position. That way every trade risks the same share of your account, whatever the chart looks like.

Common mistakes

• Stops that are too tight. If your stop sits inside the normal back and forth of price, ordinary noise will hit it even when you're right. The checker compares your stop with ATR, the typical candle size, to catch this.
• Moving the stop further away when price gets close. That turns a planned small loss into an unplanned big one.
• No stop at all. One bad move, often around news, can undo months of careful gains.

Key points

• Put the stop where the idea is proven wrong.
• Control risk with lot size, not stop distance.
• Never widen a stop once the trade is open.

Try it in the checker

Drag your stop closer to entry and watch the "stop versus noise" factor change. Then put it back beyond the nearest swing and see how the lot size adjusts to keep your risk the same.