Entries and stops
A swing signal is two prices, not one. The entry says where the method gets in. The stop says where it admits the idea was wrong. A signal without a stop isn't a complete signal.
Why every entry has a stop
The stop isn't there as an afterthought. It's part of the logic. Each signal rests on an assumption: in a continuation buy, that the dip has ended; in a change of trend, that the old trend has broken. The stop is placed at the level that would prove the assumption wrong.
For a continuation buy, that's below the low of the dip. If price returns there, the dip hadn't finished. This is why the signal's stop is a chart level rather than a round number or a fixed percentage: it carries information about the market's structure.
Sells work in reverse: the stop sits above the high of the bounce. In the signals guide, buyAt or sellAt is the entry, and stopAt is the level that proves the signal wrong.
The risk: the distance from entry to stop
The gap between the entry and the stop is the most the trade is meant to lose, per share or per point.
Take a hypothetical stock: long at $50.00, stop at $48.00. The risk is $2.00 a share. If the stop is reached, the trade loses $2.00 a share. If the stock reaches $54.00, it has made $4.00 a share, twice what it risked. On an index the same idea is counted in points: long at 4,000 with a stop at 3,960 risks 40 points, and a move to 4,120 is +120 points.
The risk is fixed before the trade starts, so every result can be compared with it afterward: a trade that made $6.00 a share on a $2.00 risk made three times what it risked.
Judging results against the risk
A dollar result on its own says little. +$4.00 a share is a fine result on a $2.00 risk and a poor one on a $10.00 risk. Comparing each result with what the trade risked makes trades in different stocks comparable.
It also keeps attention on the right question. The question isn't whether a trade won. It's whether the winners, set against what they risked, pay for the trades that were stopped out. Page 7 builds on that.
A trade that doesn't work
Not every entry follows through. Here's one example, with made-up numbers. A continuation buy has its entry at $50.00 and its stop at $48.00. Price trades through $50.00, the position is open, and over the next two days the move fades. Price falls back to $48.00 and the stop is reached.
The loss is $2.00 a share, which was known at the start. It's the cost of the idea, the same size as the risk taken, and no more. The method then moves on to the next signal.
That's the purpose of the stop. It turns an unknown loss into a defined one.
When a stop moves
A stop starts where the signal puts it. The signals give that first stop; they don't manage a trade after it opens. Whatever does, a stop moves in one direction only: toward the market, never away from it.
Our backtests show one common way to manage a trade. Once it has moved far enough in its favour, the stop moves to the entry price. This is called moving to break even, and from then on the worst outcome is a trade that costs nothing. How far a trade has to move before this happens is a matter of testing, and it varies by signal type.
A stop that moves toward the market is tightening. A stop that moves away from it is hope, and no part of the method does that. If the level that proved the idea wrong is reached, the idea is over, whatever the loss so far.
Where this leads
Knowing the risk per share, the next question is how many shares to trade.
Next: Position sizing and risk.