Stop LossSL
A stop loss is an exit you set in advance — usually an order — that closes a losing trade automatically once the price reaches a level you chose.
Every trade can be wrong. A stop loss is how you decide, before you enter, how wrong you are willing to be. It turns a vague hope — “I’ll get out if it gets bad” — into a price and an amount of money. Used well, it is the single most important tool for keeping one bad trade from damaging an account. Used badly, or misunderstood, it can give a false sense of safety, because a stop is a trigger, not a guarantee.
- Category
- Risk Management
- Reading time
- 11 min
- Also called
- Stop-loss order, Stop, Protective stop
- Updated
A stop loss in plain words
Imagine you buy a share for $50. You decide that if it falls to $47, your idea was wrong and you want out. You tell your broker in advance: if the price drops to $47, sell my shares. That instruction is a stop loss.
The point is that the decision is made while you are calm, not in the middle of a falling market when fear and hope fight each other.1 If the price never reaches $47, the stop never does anything. If it does, you are out, with a loss you planned for.
For a short position it works the other way round: the stop sits above your entry, because a short loses money when the price rises.
How a stop loss works, step by step
This walks through a stop-loss order on a long position in shares. The same logic applies to other markets, with platform-specific details covered further down.
Decide where the trade is proven wrong
Choose the stop price from the chart, not from the amount you hope to lose. A common choice is just beyond a level that should hold if your idea is right — below recent support for a long, above resistance for a short.
Size the position from the stop
Decide how much money you accept losing (for example 1% of the account), then divide it by the distance between entry and stop. That gives the number of shares. This is position sizing, and it is what makes the stop meaningful.
Place the stop order
A standard stop order stays inactive while the price is above the stop. Your broker defines exactly what “reaching” the stop means — some use the last traded price, others use quotes — so check which standard your firm applies.2
The price touches the stop price
When the trigger is hit, a standard stop order becomes a market order to sell.2 From that moment it will be filled at the best price available, not necessarily at your stop price.
Review the result
Record the planned loss and the actual loss in your trading journal. Consistent gaps between the two tell you something about the markets and times you trade.
Worked examples
Example 1 — The stop does its job
Planned lossYour account is $10,000 and you risk 1% per trade. You buy at $50 with a stop at $47, so each share risks $3. The price falls steadily and the stop fills at $47.
- No commissions; the stop fills exactly at the stop price.
| Money you accept losing (1% of $10,000) | $100.00 |
| Risk per share ($50 − $47) | $3.00 |
| Shares to buy ($100 ÷ $3, rounded down) | 33 |
| Position value (33 × $50) | $1,650.00 |
| Loss when stopped out (33 × $3) | −$99.00 |
| Loss as a share of the account | −0.99% |
The trade lost, but exactly as much as planned. Ten such losses in a row would cost about 10% of the account — painful, but survivable.
Example 2 — The price gaps through the stop
GapSame position, but the company reports bad news after the market closes. The shares close at $49 and open the next morning at $42. Your stop triggers at the open and fills near $42.
| Planned loss (33 × $3) | −$99.00 |
| Actual fill price | $42.00 |
| Actual loss (33 × $8) | −$264.00 |
| Loss as a share of the account | −2.64% |
The stop still got you out, but at a price $5 worse than planned — the loss was 2.6 times the amount you set out to risk. No ordinary stop order can prevent this, which is why gap risk matters when you hold positions overnight or through earnings.
Example 3 — A stop-limit that never fills
No fillSuppose you had used a stop-limit order instead: trigger at $47, but sell no lower than $46.50. After the same gap to $42, the limit is never reached.
| Trigger price reached? | Yes |
| Sold at $46.50 or better? | No |
| Position after the gap | Still open |
| Unrealised loss at $42 (33 × $8) | −$264.00 |
A stop-limit order protects you from a bad fill but may not execute at all if the price moves away quickly,2 leaving you in a losing position that can keep falling. It trades one risk for another.
Why a stop is a trigger, not a guaranteed price
Try it: position size from your stop
Enter your account size, the percentage you are willing to risk, and your entry and stop prices. The calculator works for longs (stop below entry) and shorts (stop above entry), and runs entirely in your browser.
| Money you accept losing (1% of the account) | $100.00 |
| Risk per share (distance from entry to stop) | $3.00 |
| Position size | 33 shares (long) |
| Position value | $1,650.00 |
| Loss if the stop fills exactly at your price | −$99.00 |
The position uses 17% of your account. Remember: a gap can fill the stop at a worse price, so the real loss can exceed the planned amount.
Stop order, stop-limit order and trailing stop
All three exit a position automatically, but they behave differently when the market moves fast.
| Aspect | Stop (stop-market) | Stop-limit | Trailing stop |
|---|---|---|---|
| What happens at the trigger | Becomes a market order2 | Becomes a limit order at your limit price2 | Becomes a market order; the trigger follows the price at a set distance2 |
| Is a fill guaranteed? | Usually yes, at the next available price | No — it may not fill at all | Usually yes, at the next available price |
| Is the price guaranteed? | No | Yes, if it fills | No |
| Best for | Getting out, whatever happens | Avoiding a fill far from your price | Locking in gains as a trend moves |
Why traders use stop losses
To cap the loss on each trade
A stop turns an open-ended risk into a planned amount, so you can decide how much of the account any one idea is allowed to cost.
To make position sizing possible
Without a stop you cannot calculate position size from risk. With one, you can keep the risk per trade constant no matter how volatile the asset is.
To take emotion out of the exit
Losing trades are hard to close by hand: hope says wait. A pre-set order executes without negotiating with you.
To protect you when you are not watching
Markets move while you sleep, work or travel. An order resting with the broker acts even when you cannot.
Advantages and disadvantages
Advantages
- Limits the loss on a trade to roughly the amount you planned, in normal market conditions.
- Makes consistent position sizing possible.
- Removes the need to make an exit decision under stress.
- Works while you are away from the screen.
Disadvantages
- Does not guarantee the exit price: gaps and fast markets can fill the order much worse than the stop.2
- Stops placed too close are triggered by normal price noise, turning good ideas into small losses.
- Obvious levels attract many stops, and the price sometimes moves through them briefly before reversing.
- A stop-limit can fail to fill entirely, leaving the position open.2
Going deeper
Read as far as you need. Each level builds on the one before it.
Always know your exit before you enter
Beginner
If you cannot say where you would get out if you are wrong, you are not ready to enter. Write the stop price down with the entry, and size the position from it. Never move a stop further away to avoid taking the loss — that only makes the loss bigger.
Placing stops: structure, volatility and noise
Intermediate
Two common methods are structure-based stops, placed beyond a swing low or high that should hold if the idea is right, and volatility-based stops, placed a multiple of the Average True Range away from entry. Both aim to keep the stop outside the market’s normal back-and-forth.
A tighter stop lets you buy more shares for the same risk, but it is hit more often. A wider stop survives noise but needs a smaller position. Neither is automatically better; what matters is that the stop marks the point where your reason for the trade no longer holds.
Moving a stop to Break-Even once a trade is in profit removes the risk of a loss — but it also makes it more likely that a normal pullback closes the trade for nothing.
Trigger prices, platforms and guaranteed stops
Advanced
Brokers differ in what triggers a stop: some use the last traded price, others use bid and ask quotes.2 On many crypto derivatives exchanges you can also choose between the last price and a separately calculated mark price, which can behave differently during sharp moves. Check the documentation of the platform you use.
Some brokers outside the US offer guaranteed stop-loss orders on CFDs for an extra fee; these fill at the stop price even after a gap. Ordinary stop orders on exchanges carry no such guarantee.
Outside regular trading hours there may be few trades, and some brokers do not activate stops in extended sessions at all. Know whether your stop is live when you are holding through the night.
Common mistakes
Trading without a stop
“I’ll watch it” fails the first time you are away, distracted or emotionally attached. Losses that were meant to be small become large.
Moving the stop further away
Widening a stop because the price is approaching it means accepting a bigger loss than planned. If the reason for the trade still holds, it should have been there from the start.
Choosing the stop from the money, not the chart
Deciding “I’ll risk $50, so my stop is $0.50 away” ignores whether $0.50 means anything in that market. Choose the stop from the chart, then size the position to fit your money.
Placing stops exactly on round numbers or obvious levels
Many traders put stops at the same visible places. A little room beyond the obvious level reduces the chance of being stopped by a brief poke through it.
Believing the stop price is guaranteed
A standard stop becomes a market order when triggered.2 Through gaps and in fast markets, the actual loss can be several times the planned loss.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- A stop loss decides in advance where a trade is wrong and how much it may cost.
- Choose the stop from the chart, then size the position: shares = money at risk ÷ (entry − stop).
- A standard stop becomes a market order when triggered; the fill can be worse than the stop, especially after gaps.
- A stop-limit controls the price but may not fill at all.
- Never move a stop further away to avoid a loss.
Frequently asked questions
Is a stop loss guaranteed to limit my loss to the amount I set?
What is a mental stop?
How far away should my stop be?
Should I use a stop on long-term investments?
Why does my stop sometimes trigger and then the price reverses?
Further learning
- Position Sizing
Turn the stop into a position size so every trade risks the same share of your account.
- Risk-to-Reward Ratio
Compare the distance to your stop with the distance to your target.
- Leverage
Why stops matter even more when the position is bigger than your money.
- Long Position
See the full life of a long trade, from entry to exit.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Fidelity. Exit Strategies (opens in a new tab) Checked .
- Investor.gov (SEC). Stop, Stop-Limit, and Trailing Stop Orders – Investor Bulletin (opens in a new tab) Checked .
Read more elsewhere
- Trading Metrics (our sister site): Stop-Loss Orders (opens in a new tab)
- Investor.gov (SEC): Understanding Order Types – Investor Bulletin (opens in a new tab)
- Investopedia: Stop-Loss Order (opens in a new tab)
- Investopedia: Stop-Limit Order (opens in a new tab)
- Investopedia: Trailing Stop (opens in a new tab)
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. Trading Metrics is our sister site, under the same ownership; we are not affiliated with any other publisher linked above. Last reviewed . Report an error or request a source credit.