Why Every Trade Needs a Stop Loss
A stop loss is the most important order you'll place on any trade. It's your predefined exit point — the price level where you admit a trade isn't working and cut your loss before it gets worse. Without one, you're not trading; you're gambling with no guardrails.
The key distinction is this: a stop loss defines your maximum loss before you enter the trade. When you know your risk upfront, you can size your position accordingly, maintain emotional control during drawdowns, and avoid the devastating spiral of hoping a losing trade will turn around.
Professional traders don't use stop losses because they expect to lose. They use them because they know that even the best setups fail sometimes. A stop loss isn't a sign of weakness — it's the foundation of a sustainable trading approach.
Types of Stop Losses
Not all stop losses work the same way. Different approaches suit different strategies, assets, and market conditions. Here are the four main types.
1 Fixed Stop Loss
The simplest approach: your stop loss is set at a specific, pre-determined price level. This might be below a support level, below a recent swing low, or at a price that represents a specific dollar amount per share of risk.
- Based on support/resistance — the most technically sound method
- Simple, clear, and easy to follow
- No adjustments needed once placed
2 Percentage Stop Loss
This approach sets your stop loss as a percentage move against your entry price. For example, a 5% stop on a $100 entry means you exit if the price drops to $95. Percentage stops are particularly useful for position sizing because they give you a consistent risk framework regardless of the asset's absolute price.
The downside is that percentage stops don't account for the asset's natural volatility. A 5% stop might make sense for a low-volatility blue chip, but it could get triggered daily on a volatile crypto asset.
Use our Position Size Calculator to determine how many shares to buy based on your percentage risk per trade.
3 Trailing Stop Loss
A trailing stop moves with your trade — it ratchets up (for longs) or down (for shorts) as the price moves in your favour. This locks in profits as the trade works, while still giving you a defined exit if the trend reverses.
Trailing stops can be percentage-based or dollar-based. A 5% trailing stop on a stock that rises from $100 to $150 would move your stop from $95 to $142.50 — securing a minimum $42.50 profit even if the stock suddenly reverses.
Calculate your exact trailing stop level with the Trailing Stop Calculator.
4 ATR-Based Stop Loss
The Average True Range (ATR) measures how much an asset typically moves in a given period. Using ATR to set your stop loss means your stop adapts to the asset's current volatility — wider stops for volatile assets, tighter stops for calm ones.
A common approach is to set your stop at 1.5× or 2× the current ATR below your entry. This gives the trade enough room to absorb normal market noise while still protecting against genuine trend reversals. It's one of the most robust stop loss methods because it's grounded in real market data, not arbitrary levels.
Try the ATR Trailing Stop Calculator to set volatility-adjusted stops automatically.
How to Set a Stop Loss
Follow these five steps every time you enter a trade. Making this a habit removes emotion from the equation and ensures you always know your risk.
Identify Your Entry Price
Know the exact price at which you're entering the trade. This is the foundation for all your risk calculations — position size, stop loss level, and risk-to-reward ratio all depend on it.
Find a Logical Exit Level
Place your stop below a support level (for longs) or above a resistance level (for shorts). If there's no clear technical level, use a percentage or ATR-based distance instead. The stop should be placed where the trade thesis is invalidated — not just where it's "a bit uncomfortable."
Calculate Your Risk Per Share
Subtract your stop price from your entry price. This gives you the dollar amount you risk per share. For example, entering at $50 with a stop at $47 means $3 risk per share.
Use the Position Size Calculator
Divide your total risk amount (e.g., 1% of your account) by your risk per share. Our Position Size Calculator does this instantly — just enter your account size, risk percentage, and stop loss distance.
Place the Stop and Don't Move It
Set your stop loss order immediately after entering the trade. Don't second-guess it. Don't widen it because you "feel" the trade might come back. Trust your analysis — if the stop gets hit, the trade was wrong, and you live to take the next one.
Common Stop Loss Mistakes
Even traders who understand stop losses often make these mistakes. Recognising them is the first step to avoiding them.
Moving Stop Losses Further Away
This is the most dangerous habit in trading. When a trade moves against you, widening your stop feels like giving the trade "room to breathe." In reality, it means you've already broken your original risk plan and are now risking more than you intended. A wider stop means a bigger loss when it eventually hits — and it usually does.
Not Using Stop Losses At All
Some traders avoid stop losses because they've been "stopped out" of trades that eventually turned profitable. The problem isn't the stop loss — it's that they're entering trades without a clear thesis or setting stops at arbitrary levels. The solution is better entries and better stops, not no stops.
Setting Stops Too Tight
Placing your stop too close to your entry means normal market noise triggers it before the trade has a chance to develop. This is especially common with volatile assets like crypto. Use ATR to understand the asset's typical daily range, and set your stop far enough away to absorb normal fluctuations.
Using Mental Stops Instead of Orders
"I'll sell if it drops below $50" isn't a stop loss — it's a plan that relies on you watching the screen and acting rationally under pressure. In fast-moving markets, you may not be watching. Place the actual order. Remove the human error.
Moving Stops to Breakeven Too Early
Moving your stop to breakeven the moment a trade moves a tiny bit in your favour can feel safe, but it often cuts winners short. The trade needs room to develop. A better approach: only move your stop to breakeven once the trade has moved a meaningful distance — ideally at least 1R (the same distance as your initial risk).
Stop Losses and Volatility
Volatility is the single most important factor in determining how far your stop should be from your entry. An asset that moves 8% in a day needs a very different stop than one that moves 1%. If you set the same percentage stop on both, the volatile asset will stop you out constantly while the calm one barely tests your level.
This is where ATR shines. By measuring recent volatility, ATR tells you exactly how much "noise" to expect. Setting your stop at 1.5× or 2× the ATR gives you a statistically grounded buffer that adapts as conditions change — widening automatically during volatile periods and tightening when markets calm down.
Different asset classes have different volatility profiles. Cryptocurrencies routinely move 5-10% in a day, while major forex pairs might move less than 1%. Individual stocks vary wildly depending on market cap, sector, and earnings expectations. A one-size-fits-all stop percentage is almost always wrong for at least some of the assets you trade.
The key insight is that your stop loss distance should be determined by the asset, not by your account or your feelings. Once you know the appropriate stop distance for a given asset, then you size your position so that if the stop is hit, you lose no more than your planned risk percentage.
Key Takeaways
- Always use a stop loss. No exceptions. A stop loss defines your risk before you enter — without it, you have no risk plan.
- Match your stop to volatility. Use ATR or percentage-based stops that suit the asset — not arbitrary levels that feel comfortable.
- Set the stop before you enter. Decide your exit price and position size upfront. Then place the actual order — not a mental note.
- Never widen a stop loss. If the stop is hit, accept it. Widening turns a small, controlled loss into a large, uncontrolled one.
- Size your position to your stop. Your stop distance determines your risk per share — use the Position Size Calculator to get the math right every time.