Percentage Stop

How to Set Stop-Loss Correctly: Common Mistakes and How to Fix Them

One of the most commonly used stop-loss methods is the percentage-based stop, which is set according to the trader's acceptable level of risk. For example, a trader may decide to risk 2% of their account per trade, while more aggressive traders might choose 5-10%.

After determining the maximum risk, the trader calculates the position size based on how far the stop-loss should be from the entry point. This approach seems logical: the stop-loss is set according to the plan, and everything appears under control. But is that really the case?

❌ WRONG!

Why Percentage-Based Stop-Loss Can Be Dangerous

✅ A stop-loss should be based on market conditions, not just on how much you are willing to lose per trade.

At first glance, limiting risk per trade based on your account balance seems reasonable. However, if the stop-loss is placed purely based on an arbitrary percentage, it may fail to account for the actual volatility of the asset and the technical structure of the market.

This can lead to two possible outcomes:

1. The stop-loss is too tight – it gets hit due to normal price fluctuations, only for the market to move in the predicted direction afterward.
2. The stop-loss is too wide – it is placed without considering technical analysis, leading to unnecessarily large losses.

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How to Avoid Stop-Loss Mistakes?

🔹 Consider market conditions
Do not place a stop-loss purely based on your account size. Instead, take into account:

• Support and resistance levels – stops should be placed beyond significant technical levels.
• Asset volatility – use the ATR (Average True Range) indicator to measure how much the price tends to move.
• Market structure – understand where other traders are likely placing their stop-losses.

🔹 Choose the right position size
If a trader wants to use a wider stop-loss to account for market fluctuations but doesn’t want to risk more capital, it’s better to reduce the position size. This allows the trader to keep risk under control while placing stops in the right locations.

🔹 Select a broker with flexible trading conditions
Not all brokers allow micro-lot trading. If you have a small capital, choose a broker that allows trading with smaller contract sizes.

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How to Set a Stop-Loss Properly?

✅ Use key price levels
Identify support and resistance zones. If you are entering a buy trade, the stop-loss should be placed below a strong support level; if selling, it should be above a resistance level.

✅ Assess volatility
If an asset has high volatility, a tight stop-loss will likely be hit too quickly. Evaluate the average daily range and place the stop at a safe distance.

✅ Use a trailing stop
If your strategy aims for long-term moves, consider using a trailing stop, which moves along with the price to lock in profits.

✅ Analyze your stop-loss performance
After a series of trades, check how often your stop-losses were triggered prematurely. If it happens too frequently, your stops may be placed too close to the entry price.

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Conclusion

🚀 The biggest mistake traders make is setting stop-losses without considering market realities.

✅ A proper stop-loss is not just the amount you are willing to lose but a strategically placed level where your trade setup becomes invalid.

 

📌 Trade based on technical analysis, not just a percentage of your balance!