What Is a Stop Loss? Types, Slippage & Placement

A stop loss is an order that closes your trade automatically if the price moves against you to a level you choose. It caps how much you can lose on a trade, as long as the market doesn’t jump past your level.

How a stop loss works

You buy at $50 and set a stop loss at $47. If the price falls to $47, a sell order is triggered and your position is closed, limiting the loss to about $3 per share. On a short trade the stop goes above your entry.

Most stop losses are stop-market orders: once triggered they fill at the next available price. See order types.

Slippage and gaps

A stop loss is a trigger, not a guaranteed price. If the market gaps, for example opening far lower after bad news overnight or after the weekend, your stop fills at the first available price, which can be well beyond your level. Fast markets around big announcements can cause slippage too.

Types of stop

Standard stop: a fixed price.
Trailing stop: moves with the price by a set distance or percentage as the trade goes your way, and stays put when it moves against you.
Guaranteed stop: offered by some CFD and spread betting brokers for a fee, and filled at exactly your price even through a gap.
Mental stop: an exit level you watch yourself without placing an order. It depends entirely on your discipline and availability.

Common ways traders place stops

Beyond a chart level: below support for a long, above resistance for a short, so normal noise doesn’t trigger it.
Volatility-based: a multiple of a measure like the average true range, so the stop is wider in volatile markets.
Percentage or fixed distance: simple, but it ignores the structure of the chart.

Size the trade from the stop

A common approach is to decide where the stop goes first, then size the position so that hitting it loses only a set amount, such as 1% of the account. The position size calculator does this. Compare the stop distance with your target using the risk-reward ratio.

Educational explanation only. ChartWatch is independent and doesn’t give trading or investment advice. Trading carries a risk of loss.

FAQ

What is a stop loss?

An order that automatically closes a trade at a chosen price if the market moves against you, to limit the loss.

Is a stop loss guaranteed?

A standard stop loss isn't. If the price gaps past it, the order fills at the next available price. Some brokers offer guaranteed stops for a fee.

What is a trailing stop?

A stop that moves with the price by a set distance as the trade moves in your favour, but doesn't move back when the price turns.

Where should I put my stop loss?

Traders often place stops beyond a chart level such as support or resistance, or at a distance based on volatility, then size the position to fit.

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