Stop-loss strategies compared: fixed %, ATR, support and breakeven

A stop-loss has one job: to end a trade at the point where your reason for being in it no longer holds. The hard part is deciding where that point is. Put it too close and normal noise stops you out; put it too far and a small mistake becomes a large one.

1. Fixed percentage stop

Exit if the price falls a set percentage below entry, for example 7 %.

Good: simple, consistent, easy to backtest. Weak: ignores the stock. 7 % is a lot for a utility and almost nothing for a small-cap biotech. It also ignores where the chart says you are wrong.

Use it when you trade a basket of similar stocks and want a uniform rule.

2. Volatility (ATR) stop

Place the stop a multiple of the stock's average true range (ATR) away from entry, for example 2 × ATR. If a stock normally moves $3 a day, a 2 × ATR stop sits $6 below entry.

Good: adapts to each stock. Volatile stocks get room, quiet stocks get tight stops. Weak: says nothing about where the thesis breaks, only about normal noise.

Use it as a floor: whatever method you use, a stop inside one ATR is usually just noise waiting to happen.

3. Structure stop (support and resistance)

Place the stop just beyond the level that would prove you wrong: below the recent swing low or support zone for a long, above resistance for a short.

Good: ties the exit to the idea. If support breaks, the setup you bought is gone. Weak: obvious levels attract many stops, and prices often wick through them before reversing. Leave a buffer.

This is usually the best primary method, with ATR as a sanity check.

4. Time stop

Exit if the trade has not worked within a set period, for example 20 trading days.

Good: frees capital from dead trades and forces you to re-examine ideas. Weak: can cut a slow winner early.

Most systematic track records, ours included, use a maximum holding period for every call, because "we'll hold until it works" makes grading impossible.

Breakeven stops: small rule, big effect

A breakeven stop moves the stop to the entry price once the trade has gone a set distance in your favour. In Kairon's grading, that trigger is 50 % of the distance to the target: if the target is +10 % and the price reaches +5 %, the stop moves to entry.

Effects you should expect:

• Fewer full losses, because trades that start well can no longer turn into large losers.
• More flat outcomes, trades that went up, came back and exited at zero.
• Some winners are cut, because the price returned to entry before continuing.

Whether that trade-off is worth it depends on the strategy. The honest way to find out is to test both versions on data the rules were not tuned on. We explain how in backtesting pitfalls.

Trailing stops

A trailing stop follows the price at a fixed distance or below each new swing low, locking in more profit as the trend continues. It works well in strong trends and poorly in choppy markets, where it gives back a lot to noise.

Mistakes that break stops

Moving the stop further away. The single most expensive habit in trading. If the reason for the stop was sound, the reason still holds when the price gets there.

Stops without size. A good stop with an oversized position is still a large loss. Size from the stop with the position size calculator.

Believing the stop is a guarantee. Overnight gaps, earnings and halts can fill you far below the stop. Reduce size around known events.

Round-number stops. $50.00 is where everyone else's stop is. $49.40 below a $50 support zone is usually better.

A practical combination

1. Find the level that invalidates the idea (structure).
2. Check it is at least 1 to 1.5 ATR away (volatility).
3. Decide the maximum holding period (time).
4. Decide whether you move to breakeven, and at what point.
5. Calculate the position size from the distance.

This guide is educational and not investment advice.