The 3-Stop Loss Trick That Can Cut Your Drawdowns in Half
Why Your Average Loss Is Killing Your Edge, Not Your Win Rate | Edition 59
What you are about to learn will massively help you reduce drawdowns and control risk.
It is a more efficient way to lose less than 1R (unit of risk) when the trade does not move in your favor, without cutting your profit potential too much.
Before I start, I want to give credit to Jeff Sun.
I learned this technique from him.
Since then, this technique has even been adopted by many traders and even some quant firms.
That shows how effective it is and how it creates an edge.
The technique is called the 3-point stop loss.
In the chart below, you have Trader A using the 3-stop strategy and Trader B using a 1 full stop strategy.
Two different stop-loss applications and their resulting drawdowns, based on a 28% win rate over a 500-trade sample size.
Notice how the drawdown is significantly smaller for the trader using the 3-stop strategy.
Most traders obsess over the same question: how do I win bigger?
They chase larger targets, push their exits, and stretch their R multiples, often without realizing they are solving the wrong problem.
The real lever hiding in plain sight is on the other side of the trade, specifically in how small your losses are.
How to use the 3-stop strategy
The core principle is to reduce your losses well before a trade hits the full stop.
Turning a -1R trade into roughly -0.67R.
I will show you an example of an entry and stop loss below.
How it works:
You enter a trade and define your full risk distance (Entry to Stop = 1R)
Split that distance into 3 equal zones
Level 1: Price drops 33% toward your stop, sell 33% of your position
Level 2: Price drops 66% toward your stop, sell another 33%
Final Stop: Only the remaining 34% exits at the hard stop
By the time price hits your stop, most of your position is already out at better prices.
A trade that would have cost you 1R now only costs roughly 0.67-0.78R.
Over hundreds of trades, that difference compounds significantly.
It is the main reason an average loss of 0.7R is achievable even with slippage and spread, and it is one of the most controllable metrics in any trading system.
BONUS: You can further reduce overnight risk by trimming 50% of the position before the market close on day 0 if your position is trading below your entry.
Why Small Losses Change Everything
The math here is deceptively powerful.
A standard 2:1 setup sounds decent.
But trim your average loss from 1R down to 0.75R and your adjusted risk/reward jumps to 2.67:1 without touching your winners at all.
Scale that up to a 3R target and you’re suddenly looking at a 4:1 ratio.
The wins didn’t change.
The losses just got a little smaller.
When you internalize this concept, the improvement in your expectancy and equity curve projection will be felt almost immediately.
The real value of the 3-stop strategy doesn’t appear in just a handful of trades.
It’s a long-term discipline that requires consistency and repetition to gradually reduce your drawdown.
Taking it to the next level
With the help of Perplexity, I was able to build a platform that automates this for me.
As you can see in the image below.
Practically, the platform connects to my broker via an API, pulls market data, calculates my position size based on the risk I choose and my stop level (Low of Day, PLOD, HOD, etc.).
Then I can select the order type Market + 3 stops, and the system automatically places the 3 stops at 33% intervals.
I do not have to do anything manually.
This gives me a huge edge when it comes to discipline and risk control.
Since I never touch the stop losses, I just hit one button and wait for the outcome.
There are many other features this tool can handle, but that is something I will show you in another edition.
If you want to understand more about the strategy we use here at Freedom Trades, I recommend joining the yearly plan.
Right now, the yearly plan is much cheaper than the monthly one.
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Vladislav
Interesting concept! Didn't even know it was a thing. I do the exact same thing without moving my stop to minimize the loss per trade. Helps me stay below my daily loss limit and gives me a fighting chance to take more trades.
Would you add the stopped portion at later stage? Under what conditions? Otherwise why don’t you reduce risk position from the beginning?