“How many pips should my stop loss be?”
Beginners ask this all the time, and the usual answer is a number: 20 pips, 30 pips, some percentage of the account.
But the question is aimed at the wrong thing. A stop loss is not first about “how much” — it is about “where”.
This is the fourth article in the MASQuant Trading Academy · Beginner Practice series. The second article worked backwards from a stop-loss distance to a position size, but that distance was simply assumed. This article fills in the step before it: how the stop-loss distance is decided.
The short answer
A stop loss is not how much you are willing to lose. It is where you are wrong.
Decide the location first, then the position size.
Two common ways to place a stop — both in the wrong order
1. By habit: “I always use 20 pips”
The same 20 pips regardless of the instrument, and regardless of whether the market is quiet or violent. But 20 pips can be a long way in a quiet market, and nothing more than one ordinary candle in a fast one.
2. By wallet: size the position first, and stop when the loss becomes unbearable
A stop placed this way is decided by the size of your account, not by the market — same chart, same entry, yet the stop moves with your wallet.
The extreme version is not using a stop at all, thinking “the most I can lose is my margin”. As the previous article explained, margin is not a stop loss.
What both approaches share: the location of the stop has nothing to do with the reason for the trade.
The market does not know your habits, and it does not know how much you can afford to lose.
Think of it as a thermometer: normal variation is not illness
Normal body temperature moves up and down a little by itself. Set the fever alarm at 36.8°C and it will keep going off — even though you are not ill.
You were not wrong. You were shaken out.
An alarm is only useful if going off actually means something is wrong. A stop loss works the same way: being hit should mean you were wrong, not that the market sneezed.
How to set a stop loss: location → distance → position size
Step 1: ask yourself “at what price am I proven wrong?”
For example: you buy above a recent swing low because you think that low will hold — what people usually call support.
If price breaks below that low, your reason no longer holds. So the stop goes a little below the low.
Entry reason: the recent swing low holds
Reason invalidated: price breaks below that low
Stop location: a little below the lowPrice tapping the low is not the same as breaking it; leaving a little room is what makes sure you only exit when the break really happens.
Shorts are the mirror image: you sell below a recent swing high because that high should cap price; if price breaks the high, the stop goes a little above it.
Your entry reason might be a moving average, a range, or something else — but the question is always the same: under what conditions does it stop being true? If you cannot answer that, the problem is not the stop loss; it is the entry reason itself.
Step 2: check that the distance is larger than normal noise
The distance from your entry to your stop has to be larger than the price’s normal movement, or you will simply be shaken out.
One common way to measure “how much it normally moves” is ATR (Average True Range), introduced by J. Welles Wilder. In plain terms, it is how much an average candle has moved over a recent period:
True Range (TR) = this candle's high - low
(if there is a gap from the previous close, the gap counts too)
ATR = the average of the last N TRs (a common default is N = 14)If the stop distance is smaller than ATR, a single ordinary candle can reach it, so it is easy to get swept. That is why many traders require the stop distance to be some multiple of ATR.
But there is no correct multiple. 1x, 1.5x or 2x depends on the instrument, the timeframe and how you trade. It is something you test and decide for yourself, not a rule. ATR also depends on the timeframe — a 5-minute chart and a daily chart can differ enormously — so measure on the timeframe that matches how long you intend to hold.
If the structural location you found sits inside normal noise, the options are to use a more distant structural level, or to skip the trade — not to pretend you did not notice.
Step 3: only now decide the position size
Once the location is set and the distance checked, it is time for the position size. The formula was covered in the second article, How do you calculate lot size?:
Lots = risk you can accept / (stop distance x value per tick)Here only one thing matters: when the stop distance changes, the position size has to change with it.
An easy example (round numbers for illustration, not market data): you habitually used a 20-pip stop with 1 lot; placing the stop by reason makes it 40 pips. Double the distance, halve the size — 0.5 lots:
| Method | Stop distance | Lots | Max loss (relative) |
|---|---|---|---|
| By habit | 20 pips | 1 lot | 20 x 1 = 20 |
| By reason | 40 pips | 0.5 lots | 40 x 0.5 = 20 |
Same instrument, same value per pip, so comparing “distance x lots” is enough. The maximum loss is identical.
The difference is:
You only exit when you are genuinely wrong.
The cost is that the same price move now produces half the profit or loss — that is the trade-off, and how much you risk per trade is your decision. Also note that a stop loss does not guarantee execution at your set price: gaps and fast markets can cause slippage, so the actual loss can be larger than calculated.
Common mistakes
1. Moving the stop further away as soon as the trade goes against you
“Just give it a bit more room” — that is rewriting the definition of being wrong after the fact. Your position size was calculated from the original stop distance, so once you move the stop, the maximum loss you decided in advance no longer exists. Adjusting in the direction of less risk is a different matter.
2. Putting the stop exactly on the most obvious level
Right on a round number, right on the swing low itself. Everyone can see those levels, and other traders’ stops may be clustered there too — one touch can sweep a whole row of them. That is why we say “a little below the low”; how little should come from the normal noise you measured in step 2, not from a number you grabbed at random.
3. Dragging a far stop closer because it is “too far”
A structurally correct stop can be far away, making the calculated position size too small to be worth trading — sometimes smaller than the platform minimum. Pulling the stop closer puts it back inside normal noise.
By the logic of this article, the answer is: skip the trade. Forcing the minimum size when the calculation says less means risking more than you decided in advance.
FAQ
How should a stop loss be set?
First find the price at which you are proven wrong, then confirm that the distance from your entry to that price is larger than normal noise, and only then work backwards from the stop distance to the position size. The order is: location → distance → size.
How many pips should a stop loss be?
There is no fixed number. The pip count is a result, not a starting point — it is measured from the price that proves you wrong. The same 20 pips means something completely different across instruments, timeframes and market conditions.
What does “being shaken out” mean?
It means the stop sits inside the range of normal price movement, so ordinary fluctuation reaches it and price then continues in the direction you originally expected. That is not necessarily a wrong call — the stop was simply too close.
What is ATR, and how many times ATR should a stop be?
ATR (Average True Range), introduced by J. Welles Wilder, measures how much an average candle moves over a period, and is commonly used to estimate “normal noise”. There is no standard multiple — it depends on the instrument, timeframe and trading style, and should be tested and decided by you rather than treated as a fixed rule.
If I place the stop further away, doesn’t my loss get bigger?
No, as long as the position size is adjusted with it. Double the stop distance and halve the size, and the maximum loss is the same; the cost is that the same price move now produces half the profit or loss. This assumes the stop fills at the set price — gaps or fast markets can cause slippage and a larger actual loss.
Closing
The first article said check the contract specs first. The second said calculate the position size first. The third said margin is not a stop loss. This one fills in the step before sizing: where the stop goes.
What decides how much money you lose is the stop distance combined with the position size; the location of the stop itself answers only one question: where you are wrong.
Decide the location first, then the position size.
Risk disclosure: CFDs are high-risk financial products that can lead to rapid loss of capital. Past performance does not guarantee future results. All strategies and backtests are for reference only and do not constitute investment advice. Please read our Risk Disclosure carefully before trading.
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