A stop-loss order is the price at which you admit a trade is wrong and get out. This page explains how to choose a stop level, how to calculate what you risk at that level, and why a stop without position sizing is only half the job.
What is a stop-loss?
A stop-loss is a pre-set order to close a position at a price that caps your loss. For a long trade it sits below your entry; for a short trade, above it. Its whole purpose is to take emotion out of cutting losers.
Why every trade needs one
Without a stop, a single bad move can wipe out months of gains. A stop turns an open-ended loss into a known, bounded number — and that number is what you plug into your position sizing.
How to choose a stop level
- Structure: below recent support (longs) or above recent resistance (shorts), where price would signal the thesis is broken.
- Volatility: far enough to survive normal noise — a stop inside the daily range gets hit constantly.
- Risk budget: your stop distance and position size together must respect your per-trade risk %.
Calculating risk from a stop
Worked example
Buy at $100, stop at $95 → risk per unit = $5
With 100 shares, total risk = $500 (5% of a $10,000 account — too much for most rules)
Position sizing follows the stop
Choose your stop first, then size the position so the total risk equals your risk budget. A wider stop means a smaller position; a tight stop allows a bigger one. This keeps every trade's dollar risk roughly equal regardless of where you enter.
Common stop mistakes
- Moving the stop wider after entry. That's not a stop, it's hope.
- Stops inside noise. Placed too tight, they guarantee being stopped out before the move.
- No stop at all. The account eventually pays for it.