Let's talk about stop loss placement — how to place your stop loss using your confirmation candle. Now that we know what makes a trade strong (strong candles and strong volume), our stop loss should be placed at the points where our trades are deemed to be incorrect.
The Philosophy of Stop Loss Placement
Philosophically, your stop loss location should be at the point where your idea is no longer valid — where your probability of being correct has diminished significantly and it's time to get out.
Your stop loss should not just be a random dollar figure. It shouldn't be "okay, I'm going to stop myself out if I lose $500." It should be "I will stop myself out at this point where my trade is no longer correct."
In the next step, we use position sizing to make your dollar loss limit and your technical stop loss location the same thing. But the stop loss itself — that has to be based on where the idea fails, not on an arbitrary number.
Two Stop Loss Techniques
We primarily use two stop loss locations with the DTR method:
- The low (or high) of the confirmation candle
- The low (or high) of the entry candle
The thing to continue building off of is the same core concept we use for confirmation. If my idea is strong, how would it behave? Now apply the inverse: if my idea is weak, where would it fail?
Think of it like this — if I'm designing a bridge and I want to see which support beam will crack first, my stop loss is once that beam gets cracked. Once I start to see that first sign of failure, I need to close my position before it costs me a tremendous amount of money.
A trade executed well with a stop loss is excellent tuition. A trade with an ignored stop loss is a very expensive regret. It is better to pay tuition than to have regrets about your trading.
The Pullback Entry Stop Loss
For a bullish trade, the default stop loss is at the low of your confirmation candle. You've identified the candle that confirmed your thesis — that candle's low is where the idea gets invalidated.
If the daily trend is bullish and you get a strong 10 AM confirmation candle, the low of that candle becomes your line in the sand. If price breaks below it, the buyers couldn't hold their ground and your thesis is dead.
In some cases, the low of day itself can serve as your invalidation point. If you've seen price bounce off it multiple times and make consistent higher highs, low of day is a reasonable alternative.
The Aggressive Entry Stop Loss
When you can't get the pullback entry — when the move happens before you can enter — you use the aggressive entry technique. In this case, your stop loss goes at the low of your entry candle.
The logic is the same: if my trade is wrong, how would it behave? It would make a lower low under my entry price and effectively reverse course. A lower low would indicate a fakeout — the move failed. And if we can't find support off of the original zone, the enthusiasm has disappeared.
So you get two approaches:
- Pullback technique: Stop loss at the low of your confirmation candle (when you enter on the pullback to that level)
- Aggressive technique: Stop loss at the low of your entry candle (when the breakout happens before you can get the pullback)
In general, I'm probably playing more aggressive entry techniques than pullback techniques, but that depends on market conditions.
Bearish Trades: Flip the Direction
To the downside, it's the exact same thing in reverse. Your confirmation candle for a breakdown — the stop loss goes at the high of that candle. If bulls can reclaim above that high, your short thesis is invalidated.
For the aggressive entry on a short, the stop loss is at the high of your entry candle. You're asking: if my short trade was weak, how would it behave post-entry? It would give a failed move to the upside, pull back under the entry price, and make a lower low.
Same framework, just mirrored.
The Key Principle: Consistency
How we pick our stop loss is going to be the same thing every single time:
- Stop loss at the low or high of the confirmation candle
- Or at the low or high of the entry candle
- With rare exceptions of high/low of day or the midpoint of the opening range
That's it. No guessing, no moving it around once you're in the trade, no hoping. Set it and respect it.
Common Stop Loss Mistakes
Here are the mistakes I see traders make constantly:
- Moving the stop loss away from the original location once they're in a losing trade. Never do this.
- Using a dollar figure instead of a technical level. The market doesn't care about your account balance.
- Not having a stop loss at all. "I'll just watch it" turns into "I'll just hold it a little longer" turns into a blown account.
- Setting it too tight. Your stop needs to be at the point of invalidation. If you set it closer than that, you'll get stopped out on normal noise and then watch your thesis play out without you.
Tuition vs. Regret
Remember: tuition beats regret, every single time. A small, controlled loss that teaches you something is infinitely more valuable than a massive loss that destroys your account and your confidence.
Use your confirmation candle to identify the stop loss location. If the move happens before you can pull back, use the aggressive entry technique and protect yourself from a new high or low against your direction.
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