Structure-Based Stops

The principle

A stop marks where your IDEA IS WRONG — not where "pain becomes unbearable." Structure-based stops sit beyond the level that invalidates the setup: below the higher low that defines the uptrend, below the support zone that must hold, below the pattern's low. If that level breaks, the reason you entered no longer exists; staying is hope, not strategy.

Arbitrary stops fail twice

A "5% because 5%" stop sits at a random price where nothing structural happens — it gets hit on normal noise (premature exits) AND fails to protect at real invalidation (the level breaks 2% below your stop and keeps going). Structure-based stops are hit only when the setup genuinely died.

The gap caveat

Stops do not guarantee the price: gaps and halts fill at the next traded price (day 4). The stop defines the EXPECTED loss and the position size; the account must survive the WORST realistic fill. That is why binary-event positions get reduced in advance, not just stopped.

Sources

• Stop-Loss OrderInvestopedia
• Trade Your Way to Financial FreedomVan K. Tharp