Stop-loss

A stop-loss is an exit order attached to an open position. For a long trade it sits below the entry and closes the trade by selling when the bid reaches that level. For a short trade it sits above the entry and closes by buying when the ask reaches it. Once triggered, it becomes a market order.

Example

Illustrative figures: you buy 0.5 lots of EUR/USD at 1.0850 with a stop-loss at 1.0820, 30 pips below. At 5 dollars per pip for half a lot, the planned maximum loss is 150 dollars. If the price falls to 1.0820, the stop triggers and the trade closes near that level.

The stop distance and the position size work together: decide where the stop belongs on the chart first, then size the trade so that hitting it costs only the amount you are prepared to lose.

Where to place it

Common approaches:

• beyond a support or resistance level, where the trade idea is clearly wrong if reached;
• a multiple of the average true range (ATR), so it reflects current volatility;
• a fixed distance or percentage, which is simple but ignores market structure.

Common misconceptions and mistakes

• A stop is not a promise of an exact price. In fast markets and over gaps it can fill worse than the level set; see slippage.
• Stops placed too tight get hit by normal price noise and spread widening at the rollover.
• Moving the stop further away once a trade goes against you turns a planned small loss into a larger unplanned one.
• Mental stops depend on you being present and disciplined at exactly the wrong moment.

See where to put a stop-loss and order types.