Stop-Loss

Deeper Explanation

A stop-loss is a commitment made before a trade is entered: if the stock falls to this level, the position will be exited, without exception and without further deliberation. It is the single most important risk management tool in momentum investing, and the one most frequently violated when it matters most. The level for the stop-loss is set based on the technical structure of the trade — specifically, the price at which the base formation is invalidated. If a stock breaks out from a base whose highest point is $100, the base began to form at $90, and the stop-loss is placed at $93 (just below the structure), a decline to $93 tells you the breakout has failed and the base is broken. The subsequent decline could easily be to $80 or below. Exiting at $93 limits the loss to 7%. Holding in hope of recovery risks a 20% or larger loss. The psychology of the stop-loss is the hardest dimension. At the moment the stop triggers, the psychological pressure against executing it is enormous: the thesis still seems intact, the news hasn't changed, selling at a loss feels like admitting failure. Every cognitive bias in the investor's toolkit — loss aversion, confirmation bias, the endowment effect — pushes toward holding. Pre-commitment — a firm, unemotional decision made before the position is entered, ideally with automatic execution — is the only reliable way to override these biases at the critical moment. Minervini's rule: 7–8% below the entry price for breakout trades. The specific percentage matters less than the discipline of having a number and honouring it. Investors who argue about whether 7% or 10% is more appropriate are missing the point: any consistent stop-loss system dramatically outperforms the system of "I'll reassess when it falls."