How to Set a Stop Loss Correctly

Five lines that must agree

A stop loss is set correctly when five lines agree. Take the euro against the dollar at 1.17166, its 10:15 close on 17 December 2025. The distance is chosen — 25 pips here, as an example, which is 0.00250 on a five-decimal price. The stop price follows: for a buy, 1.17166 minus 0.00250, or 1.16916. The money the account allows is set — one per cent of a 10,000-dollar example account, 100 dollars — and the size follows from that and the distance: 100 divided by 25 times 10, or 0.40 lot. The stop then costs exactly 100 dollars if it is hit. Change any one of the five and another has to move to keep them agreeing.

A fuse cut to its circuit

Picture a fuse. It is cut to the circuit it protects — the number on it is the most the circuit may take — and it blows before the wiring does. A stop loss is the fuse on a trade, and the money is its rating: 100 dollars in the first drawing, one per cent of the account. A fuse rated too high never blows and the wiring burns; that is a stop so far away that the loss it allows is bigger than the account can take. Rated too low it blows on every kettle; that is a stop inside the ordinary movement of the price. The rating comes from the account. The distance is fitted to it, not the other way round.

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