The Stop-Loss Contract

Goal: Treat the stop as a binding contract signed at entry — and know every classic way traders break it.

The stop-loss is a contract you sign with yourself at the only moment you are qualified to sign it: BEFORE the position exists, while you are calm and the math is clean.

The terms

The stop sits where the trade's thesis is wrong — for this system, beyond the structure that fired the signal (you learned why in M02-L03). It goes in WITH the entry as a resting order. Its dollar cost was decided by the sizing formula. When it hits, the contract executes and you are flat. All terms final.

The four classic breaches

Moving it. Price approaches, and the hand reaches for "just a little lower." You are not adjusting a stop; you are unsizing a loss you already agreed to. The first move is never the last.

Pulling it. "It will come back." The position is now a hope with leverage. Hopes at 10x have a documented mortality rate.

Mental stops. "I'll close it manually at the level." At the moment of truth, the version of you at the screen is the worst negotiator you employ. Resting orders do not negotiate.

Averaging into it. Adding to a loser to improve the average is buying MORE of a thesis the market is actively rejecting, while widening the wrongness budget mid-trade.

Why honored stops are cheap

A stopped trade costs the planned R — a known, boring number from M03. Every breach above converts a boring number into an open-ended one. Module 1 taught you the floor below the stop (liquidation); there is no floor below a pulled stop except that one.

Takeaways

▸ The stop is signed at entry, calm, with the math — and rests on the book.
▸ Four breaches: move, pull, mental, average-down. All convert planned R into open-ended loss.
▸ Stopped-out is the system working. The thesis was wrong; you paid the planned bill.

Checkpoint

Answer all questions correctly to complete the lesson. Misses reset for another pass — no penalty.

1. Price nears your stop and the setup 'still looks good'. You:

2. A mental stop is:

3. Averaging into a loser is: