Stop Loss
A predefined exit that closes a losing trade before the loss becomes serious.
Also called: stop · sl · protective stop
Written by Javier Sánchez Ros
In plain language
A stop loss is the price at which your trade idea is proven wrong. It is a statement about the market, not about how much money you feel like losing.
Its location should come from structure — below the swing low that would invalidate a long, or beyond a volatility band the instrument does not usually cross. Only after that do you translate it into money.
The distance between entry and stop is your risk per unit. That single number, divided into your risk budget, is what determines position size. Move the stop and the correct position size changes with it.
The formula
Risk Per Share
Entry − Stop Loss (long) · Stop Loss − Entry (short)
- Entry
- The price you open the position at
- Stop Loss
- The price where the idea is invalidated
Worked through
The same losing trade, held and stopped
- Entry
- $50.00
- Stop at $48.30
- −$1.70 per share
- Price four weeks later
- $38.40
- Difference
- 6.8× the planned loss
Nothing unusual happens in this story. The trade is simply wrong, the way roughly half of all trades are wrong, and the only variable is whether an order was sitting there to end it.
With the stop, the loss is $1.70 a share — a number chosen in advance, sized so the account barely notices, and forgotten by the following week. Without it, the position is still open at $38.40 and the trader now owns a decision they never consciously made: to risk 6.8 times what they intended.
The reason the second version happens is not carelessness. It is that closing a losing position converts a temporary, deniable loss into a permanent, recorded one, and the mind will produce a great deal of analysis to avoid that. A resting order is not susceptible to any of it.
That is really what a stop buys. Not a better exit price — often it is a worse one — but a decision made while calm, executing at a moment when you are not.
Change the numbers
This is the concept as a working tool. Edit any field and watch what moves — that relationship is the thing worth remembering.
- Stop Distance
- $2
- As % Of Entry
- 4%
- Shares For That Risk
- 50
Halve the stop distance and the share count doubles. Your dollar risk stays at $100 either way — the position just gets more sensitive to each cent of movement.
Size a full trade around this stopSeen on a chart
Why it matters
Without a stop, one trade can undo months of work. With one, every loss is a known, survivable, pre-priced cost of doing business.
Common mistakes
- Setting the stop by dollar comfort rather than by where the setup fails.
- Widening the stop while the trade is open, which silently turns a 1% risk into a 3% risk.
- Placing stops just beyond obvious levels where liquidity is thickest.
- Assuming the stop caps the loss exactly. Gaps and slippage can push the fill well past it.
Put it to work
Keep exploring
These concepts are connected. Understanding one usually makes the next one easier.
The amount of an asset you buy or sell in a single trade.
The fixed share of your account you are willing to lose on any single trade.
The gap between your entry and your stop loss — your risk on a single unit.
A predefined price where a winning trade is closed automatically.
A stop placed at a multiple of the instrument’s Average True Range rather than a fixed percentage.