Strategies · Lesson 11 · Beginner
Stops and Leverage Under Control
You place stops outside the market noise and never at the liquidation price, and you know the real math of leverage.
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Stop Before the Liquidation
Set the stop right at entry as a real order, not just mentally. Move it only in the direction of the trade, never give a loss more room.
Place it behind valid support or resistance, outside the noise, but never at the liquidation price. With high leverage the stop and the liquidation move dangerously close together.
Crank up the leverage and watch the liquidation price move toward your stop.
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Test yourself
At your high leverage the stop sits behind the liquidation price. What does that mean?
- You get liquidated before your stop triggers, so lower the leverage
- No problem, the stop still protects you
- Does not matter, you do not need stops with leverage
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The key points at a glance
- Stop as a hard order right at entry, never just mental.
- Outside the noise, about 1x to 2x ATR, not on round numbers.
- Stop before the liquidation, never behind it.
- Low leverage is the most direct via negativa measure.
Deep dive
Where does the stop really belong?
A stop close to the obvious level gets taken out on every test. Set it outside the noise. Goodman thinks in ATR: 1x to 2x ATR adjusts automatically to volatility, fixed percentages do not.
- 0.5x ATR: many small stop-outs
- 3x to 4x ATR: room, but large individual losses
- Do not set it on round numbers, that is where stop hunting lurks
- Immediately as a hard order at entry, only trail in the trade direction
Stop and liquidation: the real leverage math
The most dangerous mistake is a stop behind the liquidation price: you get force liquidated before it triggers. If it sits behind it, lower the leverage until the stop is in front again, instead of moving the stop.
- Taleb: a 5 percent move against 10x is a 50 percent loss
- High leverage moves stop and liquidation so close that noise throws you out
- Low leverage is the most direct via negativa measure
Why the stop still guarantees nothing
Elder is honest: the stop limits the loss but does not guarantee the maximum loss, because prices gap over it. In liquidation cascades your stop is executed at the next available price, not at the set one.
That is why you need a second line: a small position plus the 6 percent rule. Goodman's 12000 pound day shows the alternative, stop overruled, averaged in, wiped out. Keep the size so small that even a blown-through stop stays repairable.
Sources: Elder, Murphy, Goodman, Taleb
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