Stop Loss
You can explore the materials without registering, but with a free account you can track your progress and earn rewards along the way. By the end of your learning journey, you can have the knowledge you need to become a profitable Trader!
Join →What Is a Stop Loss?
A stop loss is a risk-management instruction designed to limit the loss on a position if price moves against us. A stop loss is not a guarantee that the maximum loss will equal the distance between entry and stop, because execution can be affected by gaps, volatility, liquidity, and slippage.
Stop Loss and Risk
The stop level should be connected to the trade’s invalidation logic and position size rather than chosen only because it represents a convenient percentage. We should determine how much capital is at risk before entering the trade.
Example
If we buy a stock at 100 and define 95 as the point at which the trade thesis is no longer valid, a stop loss may be placed around that level. A gap below 95 could still result in an execution below the intended stop price.
Key Terms
Stop loss, risk management, invalidation, slippage, gap, position size.
Knowledge Check
- What is the purpose of a stop loss?
- Why is a stop loss not an absolute guarantee of a maximum loss?
- Why should stop placement and position size be considered together?