What Is a Stop-Loss in Trading?

A stop-loss is an order that closes a position when the price reaches a level you set in advance. Its job is to decide the largest loss on a trade before you open it, when you are calm, instead of while the price is moving against you. Without one, the loss is whatever you are willing to sit through.

There are common ways to choose the level. Some traders use a fixed percentage from the entry. Others place it beyond a market feature such as a recent swing low or high, where the idea behind the trade would be wrong. Others set it by volatility, for example a multiple of the average recent range, so the stop sits outside normal noise. No method works in every market, so choose by where the trade idea fails, not by how much loss you can afford.

The stop and the position size are linked, and one decides the other. The amount you risk divided by the distance to the stop gives the size. A wider stop means a smaller position for the same risk. The position size calculator does the arithmetic, and the risk reward ratio calculator shows what the stop distance means for your target.

A stop does not guarantee the exit price. A stop-market order is filled at the next available price, which in a fast market or after a gap can be worse than the level you set. A stop-limit order avoids that but may not be filled at all. Leveraged positions can also be liquidated before a distant stop is reached, as the liquidation price calculator shows.

Placing a stop is the easy part. The hard part is leaving it where it is. Moving it further away or removing it turns a planned small loss into an open-ended one, and it is one of the most common ways traders break their own rules. See why traders move their stop-loss.