The Stop Loss
Once we have decided what percentage to risk on each trade, we can calculate the number of shares to buy or sell. This requires knowing the stop loss location. In other words, the trader needs to decide the point at which he or she will admit defeat if the trade does not go his or her way. 

Stop losses are tricky. Most traders who use them err on the side of being too tight. They place their stops too close together. Many others don't use them at all and leave themselves unprotected. Others use fixed dollar stops that do not take volatility into account.                                 

 The key to profitable trading is a well-placed stop loss, and much time should be spent on investigating this subject.

Where exactly should we give up on a trade? In theory, I believe the optimal point to leave a trade is when we can see the next entry. For example, if the market is in an uptrend, there comes a point where a pullback becomes big enough to warrant selling the position in case a major trend reversal is at hand. 

By leaving at this inflection point, we avoid a potential major trend reversal. If the uptrend shows us the money by reasserting itself after a period of weakness, we can re-enter the trade with a setup designed to buy pullbacks. This way, we always trade from a position of financial -- and mental -- strength.