What Is Stop Loss?
A stop loss is a standing order placed below the entry price (for longs) or above (for shorts) that triggers a market exit if reached. Its purpose is to cap loss on any individual trade to a predefined amount.
Good stop-loss placement balances two competing concerns: tight enough to make the loss small if wrong, wide enough not to be hit by normal noise. Common methods include percent-based (e.g., 2% from entry), ATR-based (e.g., 1.5x ATR), and structural (just below the nearest swing low for longs).
A stop loss is not a guarantee — in fast markets, slippage can cause execution at worse prices than the trigger. Stop-limit orders address this by adding a limit price, but they introduce the opposite risk: in fast moves the limit may not fill at all. For most retail traders, market stop-losses on liquid instruments are the right default.
Related terms
- Take Profit — A predefined exit price that locks in gains when a trade reaches a target.
- ATR (Average True Range) — Volatility indicator measuring the average range of price movement per candle.
- Position Sizing — Determining how many shares or contracts to trade based on account size and risk tolerance.