January 14, 2021

# What is a Good Stop Loss Percentage?

What is a good stop loss percentage?

The answer to this question depends on a lot of the variables of each individual trader.

The two biggest factors are how big position sizing is and how big the winning trades are expected to be inside of a trading strategy. As a trader has to manage their risk of ruin to avoid getting into a drawdown too big to get out of and they must manage their risk/reward ratio to maintain profitability.

There are two types of stop loss percentage, one is the percentage of price movement and the other is percentage of total trading capital at risk.

For example if an account is \$100,000 and a stock is \$50 then 200 shares would be \$10,000 with a \$5 stop loss for a 10% stop loss and 1% of total capital at risk.

• Account size \$100,000
• Stock price \$50
• Position size \$10,000 = 10% of capital
• Stop loss -\$5 = 10% percentage of stop loss of price
• Total risk with stop loss limit = \$1,ooo which is 1% of total trading capital

The stop loss in correlation to total capital percentage at risk should be the biggest determinant of proper position sizing. If you have a small trading account and are all in on a trade with a 100% position size (this is almost always a bad idea) then the most you can allow for is a 1% to 2% move against you as getting losses of 3% or more in total trading capital can lead to big drawdowns during losing streaks. Not to mention the dangers of total risk on an adverse gap down on news. On the other hand if you are managing an investment portfolio then a 1% or 2% position sizing of total trading capital into a position can allow you to let the position run with no stop loss as losing 100% of 1% or 2% of total investment capital will have little effect on your total portfolio but a 10X bagger could make your yearly returns at times.

When considering the dangers of the risk of ruin with losing more than 1% or 2% of total capital in a move against you here is a breakdown of good stop loss percentages to consider based on position sizing:

• A 100% position of your total trading capital gives you a potential 1% stop loss on your position to equal 1% of total trading capital.
• A 50% position of your total trading capital gives you a potential 2% stop loss on your position to equal 1% of total trading capital.
• A 25% position of your total trading capital gives you a potential 4% stop loss on your position to equal 1% of total trading capital.
• A 20% position of your total trading capital gives you a potential 5% stop loss on your position to equal 1% of total trading capital.
• A 10% position of your total trading capital gives you a potential 10% stop loss on your position to equal 1% of total trading capital.
• A 5% position of your total trading capital gives you a potential 20% stop loss on your position to equal 1% of total trading capital.

Note that for price action traders it is smart on a trade entry to target a key technical level where price should not go if a trade is going to work out and set your stop loss at that area and adjust your position size based on the loss percentage if the stop loss is triggered.