et’s kick things off with the simplest kind of stop: the percentage-based stop loss.
This type of stop is based on a fixed percentage of your account that you're willing to risk on a single trade.
For example, you might decide, “I’m only risking 2% of my account on this trade.”
That percentage can vary depending on your trading personality. Aggressive traders might go as high as 10%, while more conservative ones usually stay below 1%.
Once you’ve decided how much of your account you’re comfortable risking, you use that info—along with your position size—to figure out how far away your stop should be from your entry point.
Sounds solid, right?
You’re following a plan and managing risk. That’s good trading, right?
Not so fast!
Here’s the catch: your stop loss should be based on the market, not just on how much you’re willing to lose.
Wait, what? That sounds contradictory, doesn’t it? Didn’t we just say risk management is key?
You're right to feel confused, so let’s break it down with an example using our old friend, Newbie Ned.
Meet Newbie Ned
Ned has a mini account with $500. The smallest trade size he can place is 10,000 units (10k). He’s watching GBP/USD and sees strong resistance at 1.5620.
According to his risk rules, he only wants to risk 2% of his account per trade—that’s $10.
At 10k units of GBP/USD, each pip is worth $1. So the largest stop loss he can afford is 10 pips ($1 x 10 pips = $10).
Ned sets his stop at 1.5630, just 10 pips above the resistance line. Smart, right?
Well… not exactly.
The Problem
GBP/USD typically moves over 100 pips a day. A 10-pip stop is way too tight in this market.
So what happens?
The price wiggles up slightly, hits Ned’s tight stop, and then plummets—just like he predicted!
He ends up with a loss and misses out on a 100+ pip move because his stop was set too close—not based on market behavior, but on what his account size could handle.
That’s the problem with using a percentage stop without considering market conditions.
You end up placing your stop at random, often in areas where price naturally fluctuates before moving in your direction.
You’re out of the trade before it even had a chance to work.
The Fix
Ned’s solution? Use a broker that fits his trading style and capital.
If he switches to a broker that allows micro lots (1,000 units), then each pip is only worth $0.10.
Now he can widen his stop to 100 pips and still only risk $10 (100 pips x $0.10 = $10).
This gives him the flexibility to place his stop where it actually makes sense—based on support, resistance, volatility, or his trading system—not just on account size.
Moral of the story: A percentage-based stop is only helpful when used alongside proper position sizing and market analysis. Don’t just focus on how much you want to risk—make sure your stop makes sense in the context of the trade itself.