Stop Loss: What It Is and Where to Place It

A stop loss is an order that closes your position automatically if price moves against you to a level you chose in advance. It turns "I will get out if I am wrong" into an instruction the platform executes, so one bad trade cannot grow into an account-ending loss. Every one of the types of trading, from scalping to position trading, relies on it in some form.

Quick answer: A stop loss is a pending order that exits a trade when price reaches a preset level against the position, limiting the loss. A stop-market order becomes a market order when triggered and can fill at a worse price (slippage), while a stop-limit order caps the fill price but may not fill at all.

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What is a stop loss?

A stop loss is an order to exit a position once price trades at or through a specified stop price that is worse than the current price. For a long (buy) position the stop sits below the entry; for a short (sell) position it sits above.

The real job of a stop loss is to define risk, and that risk decides how big the position should be.

Stop-market vs stop-limit: what is the difference?

A stop-market order becomes a market order when the stop price is hit, so it fills at the next available price. A stop-limit order becomes a limit order when the stop price is hit, so it only fills at your limit price or better. (see market order vs limit order).

What happens to a stop loss when price gaps?

When price gaps through your stop, a stop-market order fills at the first available price after the gap, which can be far worse than the stop. A gap is a price jump with no trading in between, typically after a weekend, earnings or major news; the difference between stop and fill is slippage.

Worked example: you buy a stock at 50.00 with a stop-market at 48.50, risking 1.50 per share. Bad news hits overnight and the stock opens at 46.00. The stop triggers at the open and fills around 46.00, a loss of 4.00 per share instead of 1.50. On 66 shares that is 264 USD instead of the planned 99 USD.

With a stop-limit at 48.50 and a limit of 48.30, the 46.00 open is below the limit, so the order does not fill. You are still long, down 4.00 per share, and the loss can keep growing. That is why most traders use stop-market orders for protective stops: an imperfect exit usually beats no exit.

Where should you put a stop loss?

You should put a stop loss at the price that proves your trade idea wrong, not at an arbitrary distance chosen to keep the loss small. There are three common ways to find that level.

Stop loss based on market structure

A structure stop goes just beyond a level the market should not reach if your idea is right. For a long trade, that is usually below the most recent swing low or below a support level; for a short, above the recent swing high or resistance. Leave a small buffer beyond the level, because price often probes exact levels before reversing.

Stop loss based on ATR

An ATR stop uses the Average True Range, a measure of how much an instrument typically moves per bar, to set the distance. A stop placed a multiple of ATR away sits outside normal noise. The ATR indicator guide explains the calculation.

Worked example: a stock trades at 50.00 and its 14-period ATR is 1.20. A 2x ATR stop sits 2.40 below entry, at 47.60. If ATR rises to 2.40, the same rule puts the stop 4.80 away, so the stop adapts to the market.

Percentage stop loss

A percentage stop exits when the position has lost a fixed percentage of its entry price: a 2% stop on a 50.00 entry sits at 49.00. It is simple but ignores structure and volatility, so it works best as a ceiling ("never more than X% from entry") rather than the only rule.

Many traders combine the methods: find the structure level, then check it is at least one or two ATRs from entry so ordinary noise does not hit it.

What is a trailing stop loss?

A trailing stop loss is a stop that moves in the direction of a profitable trade and never moves back. For a long position it ratchets up as price rises; if price falls back to the stop, the trade closes with the gain locked in up to that point. The chart compares a fixed stop and a trailing stop on the same long trade, entered after a pullback.

The fixed stop stays just below the swing low that existed at entry, so it defines the original risk and nothing more. The trailing stop steps up under each new higher low as the trend continues.

Types of trailing stop

1. Fixed distance. The stop follows price at a set number of points, pips or a set percentage. Many platforms offer it as a built-in order, but it does not adjust to volatility.
2. ATR trailing stop. The stop follows price at a multiple of ATR (2x or 3x is common), so a more volatile market gets more room automatically.
3. Structure trailing stop. You move the stop manually to just below each new higher low (long) or above each new lower high (short). It follows the trend's own shape but takes judgement and attention.

The next chart shows an ATR trailing stop, with the 14-period ATR in the lower panel.

In the quiet first half, ATR is low and the 2x ATR stop trails close to price. As ranges expand and ATR climbs, the stop sits further from price, so the extra volatility does not knock the trade out early. The stop only rises or stays flat; it never moves down.

A tight trail keeps more of the gain on a reversal but gets hit by normal pullbacks; a wide trail rides trends longer but gives back more. Trailing stops suit trend-following styles like swing trading better than range trading.

How do you size a position from your stop loss?

You size a position by dividing the money you are willing to lose by the distance from entry to stop.

1. Decide your risk per trade in money (1% of a 10,000 USD account is 100 USD).
2. Find your stop level using structure, ATR or a percentage.
3. Measure the stop distance (entry minus stop for a long).
4. Divide the risk by the stop distance to get the position size.
5. Round down, never up.

Stock example: entry 50.00, stop 48.50, so the distance is 1.50. 100 ÷ 1.50 = 66.67, so you buy 66 shares. If the stop is hit without slippage, the loss is 66 × 1.50 = 99 USD.

Forex example: you buy EURUSD at 1.1000 with a stop at 1.0975, a 25-pip stop. 100 ÷ 25 = 4 USD per pip. A standard lot of EURUSD is worth about 10 USD per pip, so 4 ÷ 10 = 0.4 lots.

A wider stop gives a smaller position and a tighter stop a larger one, but the money at risk stays 100 USD. The free position size calculator does this arithmetic for any instrument.

How does stop placement affect your reward-to-risk?

The stop distance is the risk side of your reward-to-risk ratio, so it decides how often you need to win to break even. The chart shows the break-even win rate for each ratio, before fees and spreads.

At 1:1 you need to win 50% of trades to break even; at 1:2, 33.3%; at 1:4, 20%. The formula is break-even win rate = 1 ÷ (1 + reward-to-risk). A tighter stop raises the ratio on paper, but if normal noise hits it more often, the real win rate falls too. The risk-reward ratio guide covers choosing targets.

What is a mental stop loss?

A mental stop loss is an exit level you keep in your head instead of placing as an order, closing the trade manually if price reaches it. The risk is that you must be watching and must act: a dropped connection or hesitation can turn a planned 1% loss into a much larger one. For beginners, a hard stop placed with the order is the safer default. If you use mental stops, write the level in your trading journal before entry and keep a wider backstop order in the market.

What are the most common stop loss mistakes?

The most common stop loss mistakes are setting the stop too tight and moving it further away once the trade goes against you.

• Too tight. A stop inside normal noise gets hit even when the idea was right. If it is less than about one ATR from entry, it is often too close.
• Moving the stop away from price. Widening a stop after entry increases the risk you agreed to, usually at the worst moment. Stops should only move in the trade's direction.
• Sizing first, stop second. Choosing the position size and then squeezing the stop to fit puts stops in meaningless places.
• No stop at all. Hoping a loser comes back is how small losses become large ones. Broker disclosures and academic studies consistently find that most retail day traders lose money, and unmanaged losses are part of why.

The trading psychology guide covers why these habits feel so natural.

How do stop losses work in a prop firm challenge?

In a prop firm evaluation, stop losses are the main tool for staying inside the account's loss limits. Velotrade, a multi-asset prop trading firm offering simulated evaluations, does not make stop losses mandatory, as long as you stay within the daily loss limit and the static maximum drawdown.

The daily loss limit resets at 00:30 UTC and is set from the higher of your balance or equity at that time: 5% on CLASSIC 2-Step, 4% on CLASSIC 1-Step and 3% on PRO 1-Step. On a 10,000 USD CLASSIC 2-Step account that is about 500 USD, so at 1% risk per trade you could take roughly five full stop-outs (before slippage) before reaching it. The maximum drawdown is static, measured from the starting balance, as the static maximum drawdown guide explains. You can compare plans on the challenges page.

Can AI help with stop loss placement?

AI can help with the analysis around stops: measuring typical volatility, reviewing journal data to see whether your stops are consistently too tight, or speeding up tests of different stop rules on historical data, which the guide to backtesting trading strategies walks through.

It does not remove risk: markets change and a rule that worked historically can fail. Treat AI output as input to your own judgement; AI trading strategies gives a realistic view of what it can and cannot do.