A stop-loss is an order that closes a position automatically once the price reaches a level you chose in advance. It answers one question before the trade begins: how much am I prepared to lose if I am wrong?
Every trade can be wrong. A stop-loss does not make a trade more likely to win. It makes the loss, when it comes, a size you decided on calmly rather than one the market decided for you.
How it works
On a long position (you profit if the price rises), the stop sits below your entry. On a short position (you profit if the price falls), it sits above.
When the price touches the stop level, the platform sends an order to close. In fast markets the fill can be slightly worse than the level, which is called slippage. The stop limits the loss; it does not freeze the price.
Three ways to decide where it goes
1. Where the idea is proven wrong
The strongest placement is structural. Ask what the chart would have to do for your reason to enter to stop being true. For a long trade bought because the price held a support level, the stop belongs just beyond that support. If the level breaks, the reason for the trade has gone.
2. By volatility
A stop that is too close is hit by ordinary noise. One common way to measure normal movement is the Average True Range (ATR), the average size of a day's (or an hour's) range. Placing the stop around 1.5 to 2 times the ATR from the entry keeps it outside routine fluctuation.
3. By money
Decide first how much of the account one trade may risk, often 1% or 2%, then size the position so that the distance to the stop equals that amount. This turns the stop into a fixed cost:
| Account | Risk per trade | Entry | Stop | Distance | Position size |
|---|---|---|---|---|---|
| $10,000 | 1% = $100 | $50.00 | $48.00 | $2.00 | 50 units |
The stop came from the chart; the size came from the stop. Never the other way round.
Reading a signal's stop and targets
A trading signal usually states an entry zone, a stop and one or more targets. The relationship between them is the risk-to-reward ratio. If the stop is 5% away and the first target is 10% away, the ratio is 1:2: you risk one part to make two.
A low ratio is not automatically bad and a high one is not automatically good. What matters is the ratio together with how often that kind of trade reaches its target.
Mistakes that make a stop useless
- Moving it further away when the price approaches it. This turns a planned loss into an unplanned one.
- Setting it by round numbers instead of by the chart. Round numbers are where many other stops sit, too.
- Placing it inside normal noise, then concluding that stops "don't work".
- Trading without one because the position "will come back". Some do not.
- Risking too much per trade, so that a normal losing streak empties the account.
Moving a stop the right way
Once a trade is in profit, some traders move the stop to the entry price, a step often called going risk-free or breakeven. From then on the trade can no longer lose money, though it can still be closed for nothing if the price turns. It is a trade-off between protecting what you have and giving the trade room to work.
In short
A stop-loss is decided before the trade, placed where the idea is proven wrong, kept outside normal noise, and sized so that one loss is a cost you can repeat many times. Signals and analysis can help find entries; the stop is how you stay in the game long enough to use them.
Educational content, not investment advice. Trading carries risk, including the loss of capital.