Stops, Sizing & Risk Management

The non-negotiable part. Protect the account first, profit second.

Trendline trading can be highly profitable. It can also destroy accounts quickly if traded without proper risk management. This module is not optional.

The Stop Loss: Your Non-Negotiable Insurance

A stop loss is an automatic order that closes your trade at a predefined price if the market moves against you. It is your maximum defined loss on any trade. Never trade without one.

Where do you place it?

Bullish trendline-break trade (long): stop just below the opposing upward trendline. If price comes back down and breaks that line, your thesis is invalidated — get out.
Bearish trendline-break trade (short): stop just above the opposing downward trendline.

The trendline you entered from becomes your risk boundary. The opposing trendline defines how much you're willing to lose.

Trailing Your Stop Loss

Once a trade moves in your favor, progressively move your stop to protect gains:

Trade opens — stop at your maximum risk level (beyond the opposing trendline).
Trade moves significantly in your favor — move the stop to break even (your entry). Worst case is now a zero-loss trade.
Profit accumulates — trail the stop behind the developing trendline. As new higher lows (long) or lower highs (short) form, move the stop just beyond them.
Trade closes — when price breaks the opposing trendline, your trailing stop is hit and you exit with a profit.

This lets profits run while systematically eliminating the risk of giving back what you've made.

Position Sizing

Position size is how many shares, contracts, or units you trade. It determines how much you gain or lose per price move.

The cardinal rule: Never risk more than 1–2% of your total account on any single trade.

If you have a $10,000 account, that's $100–$200 maximum loss per trade. Calculate position size based on your stop distance:

If your stop is $0.50 away and you can risk $200 → you can trade 400 shares ($200 ÷ $0.50).
If your stop is $2.00 away → you can only trade 100 shares.

This forces you to size smaller when your stop needs to be wider — exactly correct behavior.

How to Make Money When Markets Go Down (Short Selling)

How do you profit from a downward break if prices are falling? Through short selling:

Your broker lends you shares of a stock
You sell those borrowed shares at the current (high) price
When price drops, you buy them back at the lower price
You return the shares and keep the difference as profit

Example: Price is at $50. You short 100 shares. Price drops to $45. You buy back at $45. Profit = $500 (the $5 difference × 100 shares).

In futures and forex, going short is even simpler — you just place a "sell" order instead of a "buy" order; the mechanics work the same in reverse.

Next module: Common Beginner Mistakes →

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