What is a stop-loss order? A stop-loss order is a standing instruction you place with your broker to automatically sell a stock if it falls to a price you choose in advance. It exists to answer one question before you're emotionally attached to the trade: how much am I willing to lose on this position before I get out?
You buy a stock at $50 and set a stop-loss at $45. If the price drops to $45, the order triggers and the broker sells your shares — without you having to watch the screen or make a real-time decision under pressure.
Stop-loss vs. stop-limit
A plain stop-loss converts into a market order the instant your trigger price is hit — it will fill, but at whatever the next available price is, which can be worse than your trigger in a fast-falling or thinly traded stock. A stop-limit order adds a floor price: once triggered, it only executes at your limit price or better. That protects the fill price, but introduces the opposite risk — if the stock gaps down through your limit, the order may not fill at all and you stay in the position.
Setting the stop distance
The most common beginner mistake is picking a round number — "10% below my buy price" — without checking whether that's inside or outside the stock's normal day-to-day noise. A stock that routinely swings 8% in a normal week will trigger a 10% stop constantly on nothing more than ordinary volatility. A more deliberate approach sets the stop based on a level that would actually indicate something has changed (a support level, a percentage that reflects the stock's typical volatility), and then sizes the position around that distance using a position size calculator, rather than picking the stop and the position size independently.
What a stop-loss doesn't do
A stop-loss does not guarantee your exit price — only that the order will be triggered. In a sharp, fast-moving decline, the actual fill can land well below your trigger price, a gap called slippage. It also doesn't protect against a stock that gaps down overnight past your stop on an earnings miss or other news; the order still triggers, but the first available price to fill it may already be far below where you set the stop.
Trailing stops
A trailing stop is a variation that moves up automatically as the stock's price rises, staying a fixed dollar amount or percentage below the highest price reached since you set it — but it never moves down. The goal is to lock in a growing floor under a winning position while still leaving room for the stock to keep climbing, rather than selling the moment it pulls back at all.
Common mistakes
1. Setting the stop too tight
A stop placed inside a stock's normal daily range gets triggered by ordinary noise, not a real change in the story — locking in a loss on a stock that may have gone on to recover.
2. Treating a stop-loss as a guaranteed exit price
It guarantees the order fires, not the fill price. Gaps and illiquidity can produce a materially worse fill than the trigger level, especially around news events.
3. Setting the stop after already deciding the position size
Deciding "how many shares" before "how far is my stop" backs into a risk amount instead of choosing it — sizing the position around the stop distance keeps the dollar risk intentional.