A stop loss is an automatic exit order that closes your trade if price moves against you to a defined level. It's the mechanism that turns "I could lose everything" into "I lose at most $X on this trade." Without one, a single bad trade can undo months of gains.
Most traders understand this in theory. The difficult part is placement — where, specifically, should the stop go?
Types of Stop Loss
Support and resistance stop. Place the stop just beyond a level where price has historically reversed — below support for a long, above resistance for a short. The logic is simple: if that level breaks, the reason you entered the trade no longer exists. This is the most technically sound approach.
ATR-based stop. Place the stop 1–2× ATR below entry (for longs). ATR measures recent volatility, so this approach automatically widens stops in choppy markets and tightens them in calm ones. It prevents being stopped out by normal market noise. The 14-period ATR is the standard.
Percentage stop. Exit if the position drops X% from entry — for example, 7% or 8%. Simple to calculate, common in stock trading. The downside is it ignores chart structure, which means your stop might sit in the middle of a meaningful support level rather than just beyond it.
Swing low/high stop. For a long trade, place the stop below the most recent swing low. For a short, above the most recent swing high. The trade premise is invalid if a fresh low (or high) is made.
Where Not to Place Stops
Avoid round numbers. Stops at $100.00, $50.00, or $1.00 are obvious, which makes them targets. Market makers and algorithms know where retail traders cluster their stops. Place yours at $99.35 or $49.60 — just past the obvious level, not at it.
Also avoid placing stops so tight that normal price movement will trigger them. If the 14-period ATR is $3 and your stop is $1.50 away, you'll be stopped out by noise before the trade has a chance to develop.
The Correct Order of Operations
Most traders do this backwards: they decide how many shares to buy, then set a stop wherever it limits the loss to an acceptable dollar amount. The correct sequence is the opposite:
- Identify the technical level where the trade is invalidated (this is your stop)
- Calculate the distance from entry to stop in dollars or pips
- Use the Position Size Calculator to find the number of shares or lots that limits your loss to 1–2% of account
The chart tells you where the stop goes. Your risk rules tell you how many units to trade. Never move a stop to accommodate a position size you've already committed to.
Trailing Stops
A trailing stop moves with the price once a trade is profitable, locking in gains. A common approach: trail by 1×ATR below each new daily close. This lets profitable trades run while protecting the majority of gains if price reverses. Trailing stops are more art than science — the key is not trailing too tightly and getting stopped out by normal pullbacks.