1. Define invalidation
Relate the stop to the point where the setup no longer holds. Consider normal market movement and the cash risk created by the quantity.
2. Know your order
A stop-market order becomes a market order when triggered and can fill away from the trigger. A stop-limit order limits the acceptable fill price but can remain unfilled. Check which orders your broker supports and the trigger rules.
3. Allow for execution risk
Fast movement, gaps and limited liquidity can produce an exit worse than planned. Review session restrictions and order validity. A stop does not guarantee a maximum loss.
A practical example
| Example entry / stop | 1.1200 / 1.1150 |
|---|---|
| Distance | 0.0050 = 50 pips |
| Position | 10,000 EUR |
| Planned price risk | 10,000 × 0.0050 = USD 50 before costs |
Key takeaways
- Check the trigger and order type.
- Convert the distance into cash risk.
- Allow for gaps, fees and slippage.