A stop-loss is an execution request, not a loss ceiling

Teach the bound before the stop

A protective put is a long put held against a long underlying position so the maximum loss is defined by premium and strike rather than by whether a stop-loss order is filled. A long option can define that maximum loss without depending on a stop fill, and a short option can be used as a hedge in place of a stop-loss order.

Editorial reading: size the remaining hole in true-range units first, then hold the long put when the loss must stay capped even if the exchange rejects the stop or leaves it resting as an unfilled limit.

How an elected stop actually executes

A stop-loss is a working order that becomes a market order when a trigger price trades. It is intended to flatten or reduce a position, but it depends on a fill inside any exchange protection band.

Once a buy-stop is elected, the exchange submits a market order that is accepted only if the best offer lies inside a fixed protection increment of the trigger. Otherwise the stop is rejected.

In the worked example, a buy-stop at 2450.25 with a 3.00 protection increment may fill only at 2453.25 or better. A worse offer converts the order to a limit at that protection point.

After that conversion, price can continue away from the resting limit, so election of the stop does not guarantee that the futures position is closed.

The remaining hole in true-range units

A two-true-range trailing stop was specified as an overlay on pain-index entries so the allowed adverse excursion is set in volatility units after the position is open. A trailing stop is a stop whose trigger follows price by a fixed multiple of true range so the allowed loss distance scales with current volatility.

A pain-index is a short-lookback average of downside excursion in true-range units, used to flag sessions that likely ran stops and forced longs out. One pain component measures how many true ranges the session low sits below the prior close, in order to detect lows that take out stops and force longs to miss a later rebound.

Editorial reading: after a stop is working, or after it has been rejected and left as a limit, size the remaining hole in true-range units so the still-allowed loss scales with current volatility.

Fear rules that specified no stop

The fear-based long rules exit on a fading average or a close beyond a five-day mean plus one true range, and were specified with no stop, no trailing stop, and no intraday disaster stop.

An index insurance price is divided by average true range so the fear reading is not automatically higher whenever realized volatility is already elevated. That construction is a deflated-fear reading: it isolates fear relative to already-realized volatility.

A slower flatten waits until price also trades below the open by half an average true range after the fear averages have crossed lower, so a trend is less likely to be cut on the first mean-reversion tick.