Write the thesis before the stop price
Use a fictional breakout trade. Entry is PHP 100. The thesis says the breakout remains valid while the market holds above a former resistance area around PHP 96–95.
Write the worksheet in this order:
- Thesis: what the trade expects to happen.
- Invalidation: what observable market behaviour says the thesis has failed.
- Trigger: the order condition used to initiate the exit.
- Expected fill range: the price range used for normal-risk planning.
- Stress fill: a worse price used to test gap/slippage risk.
The order matters because it prevents the desired position size from dictating the stop.
Put the account consequence beside each fill assumption
Assume 150 units at PHP 100.
At a PHP 95 fill, the loss is:
PHP 5 × 150 = PHP 750
At a PHP 93 stress fill:
PHP 7 × 150 = PHP 1,050
If the account-level risk budget was only PHP 800, the normal case fits but the stress case does not. The worksheet now gives the trader a real decision: reduce size, accept the larger stress exposure as part of the plan, choose a more liquid market, or reject the setup.
Test whether the stop is analytical or emotional
Ask three questions:
- Would I place the invalidation at the same market level if my desired position size were half as large?
- Does the invalidation represent thesis failure, or merely a loss amount I dislike?
- If volatility increases before entry, does the original invalidation still mean the same thing?
If the answer changes because of desired profit or emotional comfort, the stop logic needs more work.
Include order-type and venue uncertainty without pretending certainty
Different venues and order types handle stops differently. The worksheet should therefore contain a field for the assumed trigger source and exit order behaviour, but the article should not pretend one mechanism applies everywhere. Before real use, the trader must verify the actual venue rules.
Completion check
Create one normal and one stressed fill scenario for a fictional trade. Calculate the account loss in both cases, then adjust the position size until the stressed scenario is within the risk boundary you chose for the exercise.
The goal is not to engineer a perfect stop. It is to know what the stop is supposed to mean and what happens when execution is imperfect.
*Cryptocurrency and virtual asset transactions are highly volatile and irreversible, may result in significant losses, and do not guarantee returns; customers should trade only after understanding the risks involved.
