Stop Loss Configuration
Stop Loss Configuration
Stop Loss (SL) protects your capital by automatically closing a position when the loss reaches a specified threshold. Every strategy should include a stop-loss.
Stop Loss Types
1. Fixed Percentage
The simplest stop-loss — close the position at a fixed loss percentage from entry.
| Setting | Example | |---------|---------| | Stop Loss | 2% |
For a long entry at $100, the SL triggers at $98.
2. ATR-Based
A dynamic stop-loss that adapts to market volatility using Average True Range.
| Setting | Example | |---------|---------| | ATR Period | 14 | | ATR Multiplier | 2.0 |
SL distance = ATR(14) × 2.0. In a volatile market, the stop is wider; in a calm market, tighter. This prevents getting stopped out by normal price noise.
3. Indicator-Based
Set the stop-loss at the level of a technical indicator:
- Below Parabolic SAR dots
- Below Bollinger Band lower band
- Below a moving average (SMA, EMA)
- Below Supertrend level
The SL moves as the indicator value changes on each candle.
4. Price Level
Set the stop-loss at a specific absolute price:
| Setting | Example | |---------|---------| | SL Price | $95.50 |
Useful when you have a specific support/resistance level in mind.
SL Calculation
| Direction | Fixed 2% SL | |-----------|-------------| | Long | Entry Price × (1 - 0.02) | | Short | Entry Price × (1 + 0.02) |
For ATR-based: | Direction | ATR-based SL | |-----------|-------------| | Long | Entry Price - (ATR × Multiplier) | | Short | Entry Price + (ATR × Multiplier) |
SL with Grid Entry (DCA)
When using Grid Entry, the stop-loss is calculated from the average entry price, not the initial entry:
- First grid order fills at $100
- Second order fills at $97 → average entry = $98.50
- SL at 3% from average = $95.55
The SL recalculates after each grid fill.
Common SL Configurations
| Strategy Type | SL Type | Typical Value | |--------------|---------|---------------| | Scalping | Fixed % | 0.3% – 1% | | Day Trading | Fixed % or ATR | 1% – 3% or 1-2× ATR | | Swing Trading | ATR-based | 2-3× ATR(14) | | Position Trading | Indicator | Below SMA(200) |
Tip: A good rule of thumb is to set your stop-loss at a level where your entry thesis is invalidated. If you entered because RSI was oversold, the stop should be at a level where the oversold bounce clearly failed.
FAQ
Q: What happens if the market gaps past my SL? A: In backtesting, the SL is executed at the candle's price that first crosses the SL level. In live trading, gaps can cause slippage.
Q: Should I always use a stop-loss? A: Yes. Strategies without SL risk catastrophic drawdowns. Even signal-based exits should have a safety stop.
Q: Fixed % vs ATR — which is better? A: ATR adapts to volatility, so it works well across different market conditions. Fixed % is simpler and easier to calculate risk/reward. Choose ATR for dynamic markets, fixed for consistent conditions.