Stop Loss

A stop loss is a predefined exit that closes a losing position once price reaches a set level, capping the damage from a trade that did not work. Mechanically it is usually a stop order resting with the broker, which converts to a market order when the stop price trades.

The stop belongs at the price that proves the trade idea wrong — below support for a long, above resistance for a short — and the position size is then derived from that distance. Two failure modes matter: gaps can open beyond the stop and fill far worse than planned, and stops placed at obvious round numbers get run by normal noise.