Everyone agrees stops matter. Almost nobody places them well, and fewer honor them. This lesson is the operating manual: where the stop belongs for each setup in the library, which kind of stop order to use on which kind of stock, and the two rules, the disaster stop and the re-entry budget, that survive contact with a live tape.
Stops belong at structure, never at round numbers of pain
"I will risk 20 cents" is not a stop: it is a hope with a number attached. The stop belongs where the SETUP is objectively wrong (each lesson already told you where):
- ORB (2.1): below VWAP (Aziz) or the range low: losing VWAP invalidates the pattern.
- VWAP reclaim (2.2): back below VWAP / the reclaim low: the thesis IS the hold.
- HOD break (2.3): the shelf low, per Grittani: prior support, not the breakout tick, because breakout lines get retested by design.
- Bounce (2.4): under the base low: an undercut of the flush means sellers were not finished.
- Continuation swing (2.5): the consolidation low / loss of the multi-day higher-low structure.
Then add breathing room past the obvious level: a few cents beyond, because the obvious tick is where everyone's stop rests and thin tapes routinely wick the crowd out before resuming (Lesson 0.2's wicks). Structure decides the neighborhood; the buffer picks the house; Lesson 3.1's formula then sizes the trade to fit.
Hard vs mental, honestly
The moment you can be trusted with a mental stop is the moment
you have a journal proving 100 consecutive honored exits. Until then: hard.
- Stop-market: guarantees the exit, not the price. Correct default on liquid-enough names: in a fast tape you are OUT, which is the entire job.
- Stop-limit: guarantees the price, not the exit: in a flush it can be skipped entirely, leaving you holding through the exact disaster it was meant to prevent. Use only with a wide limit band, or not at all while learning.
- Halt-prone names: accept the truth from 1.5: no stop type protects through a reopen gap. The protection there was chosen earlier, in the sizing haircut. The stop still goes on: it handles every scenario except the gap.
The two rules that keep the system honest
Moving stops: one direction only
Stops move toward the trade, never away. The healthy sequence on a working runner: structure stop → breakeven once the first target pays (partials, next lesson) → trailing behind each new higher low or the 21EMA. Each move is triggered by STRUCTURE forming, not by feelings or round P&L numbers. Widening a stop because price is approaching it is not a decision: it is the abandonment of every lesson in this module, performed one dollar at a time.
- Stops live where the setup is objectively wrong, plus a buffer past the obvious tick. Structure first, size second.
- Hard stops by default: stop-market for the exit guarantee; stop-limit only with a wide band.
- Halt names: the stop handles everything except the gap: the gap was handled by the sizing haircut.
- The disaster stop never comes off. Never.
- Two attempts per name per day. Stops move toward the trade only, on structure, never on feelings.
Drill: the wick audit
Review your last ten stop-outs (or paper-trade ten). For each, mark where the stop was and what price did in the following 30 minutes. Classify: good stop (price kept going), wick-out (stopped at the obvious level, then resumed). Count the wick-outs that a few cents of buffer past structure would have survived, and the "good stops" that saved you multiples. This audit teaches both respect for the stop and the craft of placing it one house past the crowd.