How to Trade · Phase 2 · Module T4
The sizing formula in Risk First took the stop distance as a given and noted that a later module would explain where it comes from. Reading the Chart defined the structural vocabulary it depends on. This is where the two connect.
What this module covers
Closing the loop
The sizing formula established in Risk First has four steps: decide the risk percentage, decide the stop distance, calculate what that stop costs per lot, divide risk by cost to get the position size. Step one is a decision about your account. Steps three and four are arithmetic. Step two — deciding where the trade fails — is the only step that requires reading the market, and it is the one that was left deliberately open.
The illustrative stop in that module was 20 pips. That number was chosen because it produced clean arithmetic, not because it reflected anything about price structure. Reading the Chart then defined the structural vocabulary needed to do this properly — swing highs, swing lows, the points where price has confirmed it found interest in one direction before reversing. This module uses that vocabulary to answer step two: where exactly does the stop go?
The answer is not a fixed pip count. It is a structural fact about the chart — a specific price level that, if broken, means the trade idea is wrong. Every calculation that follows is determined by that level.
The method
A trade has a reason. You are entering because you have read a structural condition — a swing low that held, a swing high that formed, a sequence of swings that describes a particular state. The stop belongs at the level where that reading is proven wrong.
For a long trade (buying, expecting price to rise): the stop goes below the most recent confirmed swing low. That swing low, as defined in Reading the Chart, is the point where downward movement paused and reversed — the level where the market found support. If price trades below that low, the support the trade depended on has failed. The stop codifies that judgment: below that level, the reason for the trade no longer holds.
For a short trade (selling, expecting price to fall): the stop goes above the most recent confirmed swing high. That swing high is the point where upward movement paused and reversed. If price trades above it, the resistance the trade depended on has failed.
In both cases the stop position is determined by the structural fact — the confirmed swing point — not by the number of pips that produces a convenient lot size. Those are entirely separate questions.
Long trade — buying
Stop goes below the most recent confirmed swing low
If price breaks below the swing low, the support the trade depended on has failed. That is when the trade is wrong — and that is when the stop triggers.
Short trade — selling
Stop goes above the most recent confirmed swing high
If price breaks above the swing high, the resistance the trade depended on has failed. That is when the trade is wrong — and that is when the stop triggers.
Place the stop below the wick of the swing low candle — below its actual lowest traded price — rather than at the closing price of that candle. A swing low's wick records the furthest point price reached before reversing; placing the stop below the wick rather than the body means the stop triggers only if price genuinely breaks through the structural point, not just revisits it. A small clearance below the wick — a pip or two on spot XAU/USD — also prevents the bid-ask spread from triggering the stop at the exact level during a momentary test. The same logic applies in reverse for the swing high on a short.
This is the entire method. Identify the relevant structural point. Place the stop beyond it. Measure the distance. Run the sizing formula from Risk First. The stop location is never adjusted to produce a desirable lot size — a point returned to below, because it matters enough to state separately.
The worked example
The same scenario as Risk First: $10,000 account, 1% risk per trade, XAU/USD at $4,200. The difference is that the stop is now derived from a structural observation rather than chosen for arithmetic convenience. Walk through the derivation with a long trade.
Structural setup
Stop distance
Position size — Risk First formula
The result — 0.20 lots — is directly comparable to the 0.50-lot figure in Risk First. Same account, same risk percentage, same instrument. The only difference is the stop: the illustrative 20-pip stop in that module produced 0.50 lots; the 50-pip structural stop here produces 0.20 lots. A wider stop, derived from where the structure actually sits, yields a smaller position. That is how it is supposed to work — the position serves the stop, not the other way around.
If the swing low on your chart is not at $4,196 but at $4,192, the distance changes to $8 ($0.10 × 80 pips), the per-lot cost becomes $800, and the position becomes $100 ÷ $800 = 0.125 lots — rounded to 0.13 lots on most platforms. The arithmetic is the same. The input is whatever the structure gives you, not a number chosen to produce a round output.
The discipline point
Sometimes the structurally correct stop is further from entry than the sizing formula can accommodate comfortably. The swing low is $30 below the entry instead of $5. The math still works — run it the same way — but the resulting position is very small.
Same account, wider structural stop
0.03 lots is 3 troy ounces. The dollar risk if stopped out is 0.03 × $3,000 = $90 — slightly under the $100 ceiling, which is fine; risking less than the ceiling is always acceptable. The position is small, but it is correct.
The temptation here is to move the stop — from $4,170 to, say, $4,185 — to get a bigger position. With a $15 stop: 0.07 lots. With a $10 stop: 0.10 lots. These feel more like real trades. But they are not — because $4,185 is not a structural level. It is simply the level that produces 0.07 lots. Placing the stop there means the stop may be hit by normal swing activity that never threatened the trade's premise. The trade is now sized to the desired position, not to the market.
The structural response
Option A: Trade 0.03 lots at the structural stop ($4,170). Risk is $90 — under the 1% ceiling. Accept the smaller position because the structure requires it.
Option B: Skip this trade. The swing low is too far for this account size at this risk percentage. A different setup with a closer structural stop will fit.
The wrong response
Move the stop to $4,185 to manufacture a larger position.
$4,185 has no structural basis. The stop will be where you chose to put it — not where the trade is wrong. If price reaches $4,185 the trade may not be over; if it reaches $4,170 the trade is. You have separated the stop from the trade's logic, which is the only thing the stop was there for.
This is the discipline rule the module leads to: the stop goes where the structure says it goes, or you don't take the trade. A small position at the right stop is a trade. A larger position at the wrong stop is not — it is a guess about where price will not reach, sized to taste.
Skipping a trade because the structural stop doesn't fit the account is not a failure. It is the system working correctly. The account size and the risk percentage together define a range of stop distances that produce executable positions. Trades whose structure falls outside that range simply don't belong in this account at this risk setting. A different trade, with a structural stop that fits, will.
Carrying out of T4