Stop Loss
Definition
A stop loss is a predetermined price level at which a losing trade is closed to limit the loss. It defines the maximum risk on a trade and is essential for calculating position size and protecting drawdown limits.
Stop losses are non-negotiable in prop trading. Without a stop loss, a single trade can wipe out your entire drawdown allowance. The stop loss determines your 1R (one unit of risk) and directly affects your position size calculation.
There are several approaches to placing stops: technical (below support or above resistance), volatility-based (using ATR), fixed pip/point distance, or percentage-based. The best approach depends on your trading style, but the key principle is that stops should be placed at a level where your trade idea is invalidated — not just an arbitrary distance.
For prop traders, the stop loss must be sized so that if hit, it doesn't consume too much of your remaining drawdown. A general rule is never risk more than 1-2% of your account or more than 20% of your remaining drawdown on a single trade, whichever is smaller. PropJournal validates your stop loss placement against your prop firm rules before you enter a trade.
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