Where to Place Stop-Loss Lines in Swing Trading

When I first started swing trading, the hardest thing for me to decide was where to place my stop-loss line. Even when I thought I had decided, ‘I will sell if it drops to this point,’ when the price actually got close, I would procrastinate, thinking, ‘Just a little bit more.’ In the end, I repeatedly ended up selling only after incurring a larger loss than I had originally anticipated.

Looking back now, the cause is clear. It was because the way I decided on the stop-loss line itself was based on nothing.

Do not place lines on round numbers

The most common mistake is to set a line at a round number, such as ‘stop loss if it drops below 1,000 yen.’ Milestones like 1,000 yen, 1,500 yen, or 2,000 yen are prices that not only I, but many other participants, are conscious of. The fact that many people place orders at the same price means that sell orders tend to concentrate in that price range temporarily, and it can be triggered by even the slightest price fluctuation.

A stop-loss line should not be placed at a round number, but at a technically meaningful level where ‘if the price breaks below this, the basis for the entry itself collapses.’

Two criteria I use to determine stop-loss lines

I mainly use two criteria in my actual trading.

**The first is the recent low.** When entering on a dip, if the stock price falls below the recent low where it rebounded, I judge that the premise of a ‘dip’ within an uptrend has collapsed. This low holds more meaning than just a number, as it is the very fact that there were investors who supported the price at that level in the past.

**The second is the moving average line.** If a stock that had been clearly trading above the 25-day moving average falls below it, I treat it as a sign that the trend’s momentum has weakened. Since the moving average is also a benchmark that many traders are conscious of, there is also a practical reason that follow-up selling is likely to occur once it is breached.

Which criterion I use depends on the basis for my entry. If I entered based on a recent low for a dip buy, I use that low as the basis for my stop loss. If I entered based on a rebound from a moving average, I use that moving average as the basis for my stop loss. It is important to align the reason for entry and the reason for exit on the same axis.

The reason for placing the line ‘slightly outside’ the level

Another thing I am conscious of is placing the line slightly outside the benchmark level, rather than exactly on it. If you place the line exactly at the recent low, you may have the frustrating experience of being stopped out just because the price temporarily dipped a few dozen yen below the low, only to rebound immediately afterward.

By placing it slightly outside the level that many participants are conscious of, you can reduce the probability of being caught up in such temporary noise. However, if you place it too far outside, the loss amount itself will increase, so that balance must be adjusted in conjunction with money management (the idea of calculating the number of shares backward from the assumed loss amount).

Make the stop-loss line an ‘order’

No matter how good the criteria for setting a line are, it is meaningless if you cannot execute it. I make it a point to place a stop-loss order at the same time as my entry. If you only keep in your head, ‘I will cut it if it drops to this point,’ your emotions will interfere with your judgment when that situation actually arrives.

If you place a stop-loss order, the trade will be settled automatically if the conditions are met, without you having to check the stock price repeatedly while holding it. Create a mechanism that follows the rules decided by the ‘calm self at the time of entry’ rather than leaving the judgment to the ‘self in the moment.’ I believe this is the shortest path to thoroughly executing stop losses.

Not moving the line is the final bastion

Finally, this might be the most important thing. It is the rule that once you have decided on a stop-loss line, you do not move it even if the unrealized loss expands. If you allow yourself to say ‘I’ll wait just a little longer’ even once, that standard will continue to loosen from then on.

A stop loss is not a task of admitting that your judgment was wrong, but a task of protecting your capital for the next opportunity. Since I have been able to perceive it that way, my aversion to stop losses has become much lighter than before.

Calculate the number of shares backward from the price range

Once you have determined the position of your stop-loss line, the next step is to decide ‘how many shares to buy based on that price range.’ For stocks where the difference between the entry price and the stop-loss line is large, you need to reduce the number of shares even with the same amount of capital. Conversely, for stocks with a smaller price range, you can buy more shares while staying within the same loss limit.

By first deciding ‘the amount of money you are willing to lose on this trade’ and dividing that amount by the price range, the maximum number of shares you can buy is automatically determined. By following this order, you can prevent the mistake of ‘placing the stop-loss line in a good spot, but buying too many shares and ending up with a large loss.’ I always make sure to think of the stop-loss line position and the share count calculation as a set.

To avoid being ‘stop-loss poor’

I often hear about the frustration of trying to be so disciplined with stop-losses that you place the line too close, only to get stopped out by minor price fluctuations. This is the so-called ‘stop-loss poor’ state.

To prevent this, it is important to set the stop-loss line not based on ‘the price range you can mentally tolerate,’ but strictly on ‘technically meaningful levels.’ If you base it on mental tolerance, you tend to place the line too close. If you set the line based on objective grounds such as recent lows or moving averages, you can judge that even if the price range is somewhat wide, it is a price movement that should be accepted as part of normal noise.

Instead of moving the line closer because you are anxious, reduce the number of shares to allow for a wider price range. Since I made this shift in thinking, the number of times I have been swayed by stop-losses has visibly decreased.

※ This article shares ideas and judgment criteria based on my own experience and does not recommend buying or selling any specific stocks. All stock examples in the article are fictional. Please make final investment decisions at your own responsibility.