Stop loss: how it works and where to place it

A stop loss is an order to close a position when price reaches a set level that is unfavorable to the trade. Its job is to limit the loss to a predetermined size. The level is usually placed where the trade scenario stops making sense, for example below support on a long, rather than arbitrarily “at a distance” from entry.

A stop loss is not a price guarantee: in a sharp move or with low liquidity, it can be filled at a worse price, with slippage. One that is too tight knocks you out of the position on ordinary fluctuations, and one that is too loose increases the loss. Removing or moving a stop loss “because price will come back” is a common mistake that turns a controlled loss into an unlimited one. The stop loss distance is used to calculate position size.