Stop loss: what it is, how it works and what it can’t do
By Bec, futures trader and founder of Wildflower · Updated
A stop loss is an order that closes a trade if price moves against you to a level you choose. It’s there to cap how much one trade can lose. It isn’t a guarantee: once reached, it usually becomes a market order, so in a fast market or a gap it can fill past your price.
What a stop loss is
A An order that closes a trade if price reaches a level you set against it. It aims to limit the loss, but in a fast market it can fill at a worse price.More in the glossary is the exit you set for when a trade goes wrong. You choose a price. If the market reaches it, your broker closes the trade, whether or not you’re watching.
It’s named for the job it does: it stops the loss growing past that price. Traders also call it a stop, an SL or a protective stop. When a stop closes a trade, traders say they were stopped out.
Under the hood, a stop loss is almost always a An order that waits until price reaches a trigger you set, then becomes a market order (or a limit order, for a stop-limit).More in the glossary: an order that waits until price reaches a trigger, then sells (or buys, for a short) at market. Read about order types.
How a stop loss works, step by step
1. You enter a trade
Here, you buy at 100.
2. You place the stop
A sell stop at 94, below your entry. It waits at your broker.
3. Price reaches the stop
A candle trades down to 94. The stop is triggered.
4. The stop closes the trade
It becomes a market sell and fills where the market is. Here, one The smallest step a price can move. On many stock index futures that’s 0.25 of a point.More in the glossary past the stop.
The loss is the distance from entry to fill, times what each point is worth, times the number of contracts. Here that’s 6.25 points. The stop decided when the trade closed. The market decided the exact price.
Stop loss on a long and a short trade
Long trade (you bought): you lose if price falls, so the stop is a sell stop below your entry.
Short trade (you sold first): you lose if price rises, so the stop is a buy stop above your entry.
What a stop loss does and doesn’t protect against
What it does: it closes the trade if price reaches your level, without you having to be there. That puts a planned limit on what one trade can lose.
It doesn’t promise your price. A stop becomes a market order, and market orders fill at the best price available. In a fast market, that can be a few ticks past the stop. That difference is The difference between the price you expected and the price your order filled at.More in the glossary.
It doesn’t protect against gaps. If the market opens past your stop, such as after a weekend, the stop fills at the first price available. That can be far beyond it.
It doesn’t stop the loss from happening. It takes the loss, so it can’t grow further. A trade that reaches its stop is still a losing trade.
It only works if it’s live. A stop that waits at your broker keeps working if your computer goes off. A stop held only by your own software, or kept in your head (a mental stop), does nothing if that software stops or you step away.
A stop-limit might not fill at all. If price jumps past its limit, the trade stays open. See the picture on order types.
Where traders place a stop loss
Where the stop goes is your call. There’s no single rule. Some of the ways traders decide:
- Beyond a chart level, such as just past a A dip on the chart: a candle whose low is below the lows of the candles on both sides of it.More in the glossary for a long trade, or past a zone. Read about support and resistance.
- A fixed distance in ticks or points from the entry.
- A distance that changes with the market, such as a multiple of the average true range, so stops are wider when price moves more. Read about ATR.
- A dollar amount the trader is willing to lose on the trade, worked back into a price.
The distance also sets your size. Say your stop is 6 points from your entry and each point is worth $5 per contract. One contract loses $30 at the stop, before fees and slippage. Two lose $60. Read about position sizing.
Trailing stops and moving a stop
A A stop that follows price as it moves your way, at a set distance, and never moves back.More in the glossary follows price as it moves your way. For a long trade, it stays a set distance below the highest price so far, and it never moves back down. If price turns and falls by that distance, the stop is reached.
Traders also move stops by hand. Moving a stop to the entry price is called moving it to breakeven. Some traders never move a stop further away once the trade is open. Whether and how you move yours is your choice.
Often confused with
Stop order. An order type. A stop loss is the job it’s doing. A stop order can also be used to enter a trade. Read about order types.
Take profit. The exit on the other side, for when the trade goes your way. Read about take profit.
Daily loss limit. A cap on what an account can lose in one day, across all its trades. A stop loss covers one trade. Read about daily loss limits.
Stop losses on Wildflower’s Bot
Every entry placed with its stop
When the Bot trades your strategy, it places each entry with its stop and target at your broker. They wait with your broker, not on your computer, so an open trade keeps its stop even if your computer goes offline. It also sizes each trade against the maximum dollar risk you set, so a trade that would risk more at its stop is made smaller, or skipped. You choose where every stop goes.
Try it free on the practice chart. Only pay when you run it through your broker, on a demo or real account.
Common questions
What is a stop loss in simple terms?
A price where your trade closes automatically if the market moves against you, so one trade can’t keep losing.
Does a stop loss guarantee my exit price?
No. It usually becomes a market order when reached, so it can fill past your price in a fast market or a gap. More above.
Where do traders put a stop loss?
There’s no single rule. Some use a chart level, some a fixed distance, some a distance that changes with volatility. More above.
What’s the difference between a stop loss and a stop order?
A stop order is an order type. A stop loss is the job: closing a losing trade. A stop loss is usually placed as a stop order.
What does stopped out mean?
Your stop loss was reached and it closed the trade.
What is a trailing stop?
A stop that follows price as it moves your way, at a set distance, and never moves back.
Does a stop loss protect against gaps?
No. If the market opens past your stop, it fills at the first price available, which can be far beyond it.
What is a mental stop?
An exit price you keep in your head, with no order at your broker. Nothing closes the trade unless you do.
Can I move my stop loss?
Yes, on most platforms you can move or cancel it while the trade is open. Moving it to your entry price is called moving it to breakeven.
What is a stop-limit, and why might it not fill?
A stop that becomes a limit order when reached. If price jumps past its limit, it waits unfilled and the trade stays open.