Lessons › Why traders lose › The one-line stop rule
World 11 · Why traders lose · lesson 2 · level 2
The one-line stop rule
Stop first, size second: size = the money you accept to lose ÷ the stop distance.
In one line
The rule behind every good stop fits on one line: stop first, size second.
Explained simply
First decide where your idea is wrong and put the stop there, with room for normal wiggles. Then measure how far away that is, in percent. Then pick the loss you accept, like 1% of your account. Divide that loss by the stop distance, and you have your size. If the stop is hit, you lose the amount you chose. No surprise.
A worked example
An example account of $10,000. You accept 1%, so $100. Bitcoin is at $44,788 and your idea is wrong below $43,801, which is 2.2% lower. Size = $100 ÷ 2.2% = $4,545. If the stop is hit, you lose about $100.
Mistakes to avoid
- Picking the size first and squeezing the stop to fit.
- Putting the stop where the loss feels small instead of where the idea is wrong.
- Forgetting that a wider stop needs a smaller size.
Check yourself
What does "stop first, size second" mean?
Decide where the idea is wrong, then work out the size. The stop comes from the chart. The size comes from the stop and the loss you accept.
Your account is $10,000 and you accept 1% per trade. How much is that?
$100. 1% of $10,000 is $100.
You accept $100. Your stop is 2.2% away. What is your size?
$4,545. $100 ÷ 0.022 = $4,545. If the stop is hit, you lose about $100.
Your stop has to be twice as far away. To keep the same dollar risk, your size should…
Halve. Twice the distance at the same dollar risk means half the size.
Why is a 1% stop on a 4-hour Bitcoin chart often a poor choice?
A normal 4-hour candle moves about 1.5%, so noise can reach it. A normal 4-hour Bitcoin candle is about 1.5%. A 1% stop sits inside normal noise.
Goal of this lesson: Work out a position size from your stop and a 1% risk.