Colm O’ Shea runs one of the largest hedge funds in the world COMAC Capital.
What I learnt from him: How to place stop losses
From his interview in the Book The Hedge Fund Wizards
First, you decide where you are wrong. That determines where the stop level should be.
Then you work out how much you are willing to lose on the idea.
Last, you divide the amount you’re willing to lose by the per-contract loss to the stop point, and that determines your position size.
The most common error I see is that people do it backwards.
They start with position size. Then they know their pain threshold, and that determines where they place their stop.