A stop loss is the price that says "this idea was wrong". When the market reaches it, you exit, usually through a stop order placed with the broker at entry. The stop does two jobs: it caps the loss on one trade, and its distance from the entry is the basis of position size and of every R-multiple.
Stop distance and risk
risk per unit = |entry − stop|
risk = risk per unit × size × contract value
Long EUR/USD at 1.0850 with a stop at 1.0820 is 30 pips of risk per unit. On 0.5 lots, at $10 per pip per lot, that is $150: this trade's 1R.
Where to place it
The stop belongs where the trade idea is invalidated, not where the loss feels comfortable:
- Structure: beyond the swing low for a long, beyond the swing high for a short.
- Volatility: a multiple of the average true range, so normal noise does not stop you out.
- Time: some setups also have a time stop, exiting if nothing happens within a set number of bars.
Then size the position so that this stop equals the amount you are willing to lose. Moving the stop closer to make the size bigger is the most common way to turn a good setup into a losing one.
Why the journal needs the initial stop
R is measured against the stop you had at entry. If you trail it to breakeven and get stopped out, the trade is 0R, not "−1R at the new stop". If you widen it and lose more, the trade is −1.8R, and that number is the evidence of moving the stop. Record the initial stop and keep it, whatever happens afterwards.
In SetupBook
The stop is a field in step 1 of the trade form. With entry, stop and size filled in, the form computes the risk and later the R-multiple, and it checks that the stop is on the losing side of the entry for the direction you chose. A trade marked with the "No stop" mistake tag is counted in the mistake cost like any other.