Risk management in practice · Lesson 2 of 3
Placing stops that mean something
Set stops by invalidation, not by a fixed percentage.
7 minute read
Invalidation over distance
A stop is most useful when it sits beyond the level that would prove your idea wrong, so routine noise does not shake you out. A stop placed by a fixed percentage can end up inside normal fluctuations or too far away to protect your account.
Remember that a market stop in a fast move can fill worse than the level you chose, and a limit stop may not fill at all if price gaps through it. The stop reduces risk; it does not guarantee a maximum loss.
Key takeaway
Use these concepts to understand the market, not to assume a particular outcome. Always define uncertainty and risk before making a decision.