Another essential topic I needed to cover in this course is how to choose the right stop.
This is not a minor detail. Stop placement can make or break a trading system — and, over time, an entire trading career. In fact, it’s impossible to truly understand my trading decisions or the systems I teach if this concept isn’t crystal clear.
Why Most Stops Are Bad
Brian Lee — a former professional videogamer turned professional trader — made a great post on Twitter that sparked an important discussion. He defined poor stop placement as:
“Placing a stop at a level that has no logical basis. People tend to generate their own logic by creating a reason or justification for their placement.”
I couldn’t agree more.
Most beginner traders place stops arbitrarily. They rely on feel, loosely defined “levels,” or vague ideas of where they are “proven wrong.” In reality, many of these levels are pure randomness — unsupported by data, backtesting, or any objective framework.
A stop without logic is not risk management. It’s guesswork.
Start With First Principles
As with every major trading question, we have to start from first principles.
I’ve said this repeatedly because it’s non-negotiable:
Expected value drives every single trading decision you make. (Learn more HERE)
We want maximum exposure when the expected value is highest.
We want zero exposure when expected value is negative.
Any time expected value drops below zero and we remain in the trade, we are giving away PnL in the aggregate over the long run. That’s a fact.
When Should We Be Flat?
In an ideal world, we would exit and have zero exposure the exact moment expected value touches zero — not one second later, as it turns negative.
That leads us to the real challenge:
If our stop needs to be placed where expected value goes negative, how do we identify that point on a chart?
This is where things get difficult.
Markets are infinitely nuanced. We never know the true probability distribution of outcomes. Context is constantly changing. Patterns evolve. No two trades are identical.
So to make progress, we need to simplify.
Stops and Trends
At its core, nearly every trade I take is attempting to capture either:
- A trend leg, or
- A counter-trend leg
Whether it’s a breaking news trade, a trend breakout, or a mean reversion setup, I’m making a directional bet on price moving in a specific direction.
Because of that, I generally want my stop placed at the point where the trend I’m trading ceases to exist.
There are many ways to define trends — which I cover extensively elsewhere — but one of the simplest and most practical methods is:
- Breaks of prior bar lows in uptrends
- Breaks of prior bar highs in downtrends
When that structure breaks, the expected value of the trade often shifts materially.
A Useful Litmus Test
One hallmark of a good stop — as opposed to a random one — is the emotional reaction when it gets triggered.
If a stop level is widely recognized as significant, its breach often produces a strong reaction and the formation of a new trend in the opposite direction.
That’s what we want.
We’re not trying to avoid being stopped out at all costs. We’re trying to ride the pendulum swings and capture the highest-probability legs of price movement — exiting when the underlying premise no longer exists.
Let the Data Decide
Ultimately, the only way to know whether you’re using the best stop is to collect data and evaluate outcomes in the aggregate.
You might test:
- Prior bar highs or lows
- Moving averages
- Time-based stops
- Other structural or system-based exits
I strongly encourage you to get your hands dirty. Test multiple approaches. Do it quantitatively, or simply by reviewing dozens — even hundreds — of charts and seeing how different stops would have performed over time.
There Is No Perfect Stop
I don’t claim that my stop placement is optimal in every instance.
I know that sometimes I’ll get wicked out. I know that in individual cases, a different stop might have worked better.
What I do know is that in the aggregate, the stops I use allow me to capture positive expectancy and sustain a long-term career in trading.
That’s the only standard that matters.
The Real Work of Trading
Everyone wants a simple, magical answer — the perfect stop that never fails.
It doesn’t exist.
What does exist is sound reasoning, rigorous testing, and a system built through deliberate effort. Nobody knows the perfect optimal stop with certainty, and that’s okay.
Our job is to crunch the data, think deeply, and build the best system we can for our specific trading style.
It takes time.
It takes effort.
It takes uncomfortable thinking.
But as I warned you from the beginning — that’s what this career demands.
You signed up for it.
Now let’s put in the work.
