Trading glossary
What is a stop-loss?
A stop-loss is an order that closes a trade automatically at a set price to limit the loss if the market moves against it.
A stop-loss turns an invalidation level into an action. When price reaches it, the position is closed. In fast markets the fill can be worse than the stop price, which is called slippage.
Stops placed just beyond obvious levels are common, which is one reason those levels attract liquidity sweeps.
How traders use it
- Base the stop on where the idea is wrong, then size the position to fit the risk.
- Give the stop room for normal volatility, for example a fraction of ATR beyond the level.
- Decide the stop before entering, not after.
Example
A trader buys gold at 2,360 with invalidation at 2,345 and places a stop-loss at 2,342. If price falls to 2,342, the position closes automatically for a loss of 18 dollars per ounce, plus any slippage.
Frequently asked questions
Where should a stop-loss go?
Beyond the level that would prove the idea wrong, with some room for noise.
What is a trailing stop?
A stop that moves in the trade's favour as price moves, to lock in part of the gain.
Related terms
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