Risk & Trade Planning

Invalidation is the condition that breaks the reason for a trade. For a hypothetical support-reclaim setup, it might be a move below the reclaim structure. For a time-sensitive breakout, it might also include failure to make progress within a defined number of bars. State the condition before the entry.

A stop order is an execution instruction used to act on a loss-control plan. It does not guarantee the exit price. Stops can slip in fast or gapping markets; stop-limit orders can fail to fill. Understand the specific order before using it as protection.

Place the technical invalidation first, then calculate whether the resulting distance fits your budget at an allowed size. Do not force a stop into normal noise merely to buy more units. If the minimum position is too large, passing is a valid decision. Widening an exit after entry increases the original planned exposure unless size is reduced; it is not a free extension of the idea.

Worked example

A hypothetical long at 104 is based on a successful reclaim above 102. Your tested rule places the protective exit at 101.50, so the planned distance is 2.50 points. Moving it to 103.90 simply to make the dollar number small changes the setup. Moving it to 100 after price falls increases the planned loss.

Try it in replay

Write an entry thesis and an invalidation sentence for a replay chart. Cover the future candles. Explain the stop location without referring to the dollar amount you hope to risk.

Check your reasoning

The invalidation should describe why the original condition failed. You can then reduce size or pass if its cost does not fit. A neat-looking risk number cannot repair an arbitrary exit.

Further reading

• SEC Investor.gov — order types