A stop loss is absolutely critical in swing trading or any kind of trading. Sadly this is often ignored. Where is the best place to place a stop loss order for a swing trader? What is the best size of a stop loss? While the exact answers will vary depending on your specific system rules, here are some guidelines to help answer these questions.
As swing traders are trading the swings in the market, one of the best places to put your stop loss is just below your entry point. The logic behind this is that if price drops down below your point of entry, then that swing is invalid and cancels out the reason for you being in the trade.
The above image shows where your stop loss may be placed on a long/buy entry. If the trade was entered into with the belief that price was going to continue higher with the uptrend, then placing the stoploss at the swing low would make sense.
The above image shows where a stop loss may be placed on a short or sell entry trade. If price failed to continue lower and instead continued higher, this would invalidate the trade setup for going short.
Just how big should a stop loss be? The most common method of setting a stop loss is based on the size what you expect to gain. You should never you a stop loss of less than 2:1. Meaning, that what you stand to profit from the trade should be twice as large as what you are prepared to lose, or the size of your stop loss. Going any smaller than a 2:1 risk reward ratio will ultimately blow your account in the long run.
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