What Is a Stop Loss and Where Should It Go?
A stop loss is an order that closes your trade automatically at a price you set in advance. Its job is to make the size of a loss a decision you made calmly, rather than one you make while the position is open and losing.
Everyone knows they should use one. The part that is rarely taught is how the price gets chosen, and there are four common answers with genuinely different consequences.
How it works
A stop loss is an order that closes your trade at a price you set in advance.
Mechanically it is a resting order sitting at that price. When price reaches it, it fires and your position closes — you do not have to be watching, and you do not have to decide anything.
That last part is the whole point. The decision gets made before you have money on the line, which is the only moment you are able to make it well.
Two kinds of stop order
Worth knowing before you place one, because brokers offer both and they behave differently in exactly the situation you need them.
A stop-market order becomes a market order when your price is reached. It gets you out, at whatever price is available. That may be worse than your line.
A stop-limit order becomes a limit order instead. It will not fill worse than the price you set — and in a fast move that means it may not fill at all, leaving you in a position you thought you had closed.
The protection against a bad fill and the risk of no fill are the same feature. For a stop whose job is getting you out, the market version is usually the one you want.
The four ways people pick the price
1. A level on the chart
Put it beyond a swing low, a level, or the edge of a range. This is the only method where the price means something — it marks the point at which your reason for the trade has stopped being true.
2. A fixed percentage
Simple, consistent, and it takes no account of the chart at all. The stop lands wherever the arithmetic puts it, which may be in the middle of ordinary noise or well past anything that matters.
Its one real virtue is that it cannot be argued with.
3. A multiple of recent range
Measure how big a normal candle is lately and place the stop some multiple of that away. This adapts to the instrument — a quiet market gets a tight stop and a wild one gets a wide one, without you deciding anything.
It still does not know where the levels are.
4. Time
Close the trade if it has not done what you expected within a set period. Rarely taught, occasionally sensible: a setup that has not worked in twenty candles is often a setup that is not going to, and the money is doing nothing while you wait.
Too tight and too wide
Too tight is the common one. The stop sits inside the range price moves in on an average day, so it gets hit by nothing in particular.
Too wide is not the opposite mistake. A wider stop with the same money at risk simply means a smaller position — that is the arithmetic on the risk management page, and it is a trade-off rather than an error.
The obvious price is the crowded one
If you place your stop just under the swing low because it feels safe, you have placed it where everyone else placed theirs. It feels safe because it is obvious, and obvious is exactly the problem — the liquidity page is the long version of this.
The fix is not to trade without one. It is to sit a little beyond the crowd and take the smaller position that requires.
A worked example
Before entering, you find the swing low. Say the entry is at 100.40 and the low is 99.72.
You place the stop below it, not on it — a little beyond where the crowd is.
You size the position from that distance, so the loss is the same fixed share of the account it always is.
Then price dips to 99.84 and turns. Your stop was never touched, and the trade is still on. That is the entire return on having chosen the price properly rather than tightly.
If you move it, move it under something real — a low price actually made, not a round number and not your entry. A stop that still marks a place where you would be wrong is still doing its job.
The original data
Across our study of 24,971 trading videos, 297 cover stop losses. The median one gets 6,000 views, 77% never pass 50,000, and the median length is 9.0 minutes — among the shortest of any topic measured.
The corpus carries description text for 139 of those 297, and across those 139, 87 mention invalidation, failure, or what going wrong looks like.
63%, which is the highest rate measured anywhere in this glossary — and it should be, on the mechanism whose entire purpose is handling the case where you are wrong. It is also the exception: most subjects here sit in single figures.
When it fails
It does not fill where you put it
A stop is an instruction, not a guarantee. If the market opens below your price — over a weekend, on news — it fills at the next available price, which can be well past your line.
Fixed risk is fixed under ordinary conditions, and those are not all the conditions there are.
You moved it
Moving a stop away from price is not patience. It converts a planned, survivable loss into an unplanned one of unknown size, and it feels reasonable every single time.
You are choosing the price to fit the position
If the stop keeps ending up wherever makes the position size comfortable, the chart is not choosing it — you are, backwards. That is the failure the risk management page is built around.
You found the price afterwards
Every stop looks badly placed once you can see what happened. The question is whether it was defensible with the chart you actually had.
Related
Risk management is the page this one feeds — the stop gives you a distance, and the distance gives you a position size.
Swing highs and lows are where the best stop prices come from, because they are prices the market made rather than numbers you chose.
And liquidity explains why the obvious stop price is the one most likely to be reached.
The rule that saved me the most money is boring: a break is a candle closing beyond the level and the next candle going the same way, not a wick through it. That is an entry rule on the surface and a stop rule underneath, because most of the trades that cost me were ones I entered on a poke and then had to defend. If I am honest the hardest part has never been choosing the price. It is leaving it alone once the position is open and the price is getting close.
— Michael Whitman, from this video
This page is educational, not financial advice. Test every idea on your own charts before risking money.