Reviewed by Gotrade Internal Analyst
If you trade stocks, ETFs or crypto, one of the first tools you should understand is the stop loss order.
Used well, it can help you limit losses and protect your account. Used poorly, it can kick you out of good trades too early or fail to trigger when the market moves fast.
This guide explains the stop loss order meaning, how stop and stop limit orders work, and the most common mistakes retail investors make when setting stop levels.
Stop Loss Order Meaning
A stop loss order is an instruction you give your broker to automatically sell a position if the price reaches a specific level.
The goal is simple. If the trade goes against you, you exit at a predefined loss instead of watching the position fall without a plan.
Key points:
- You choose the stop price when you place the order
- If the market trades at or through that price, the stop is triggered
- A standard stop loss becomes a market order once triggered and tries to fill at the next available price
You can think of it as a safety net that activates only when your trade is wrong.
How A Stop Loss Order Works
Basic mechanics
- You open a position.
- Example: buy 10 shares at 100 dollars.
- You place a stop loss order.
- Example: stop price at 90 dollars.
- If the price falls to 90 or below, your stop loss triggers and sends a market sell order.
- Your shares are sold at the best available bid price at that moment.
You do not have to be watching the screen. The order works in the background once it is in the system.
Simple example
- Entry price: 100 dollars
- Stop loss: 90 dollars
- Position size: 10 shares
If the stop fills near 90, your loss is about 10 dollars per share, or 100 dollars in total, plus any fees and slippage.
That gives you a clear maximum loss per trade before you ever click buy.
Stop Loss vs Stop Limit Orders
Many platforms also offer stop limit orders. These combine a stop with a limit price.
Stop loss order (stop market)
- Triggers at your stop price
- Becomes a market order
- Priority is to exit the position
- Fill is likely, but price is not guaranteed
This is better when your first goal is to get out, for example in a fast moving loss.
Stop limit order
- Triggers at your stop price
- Becomes a limit order with a specific minimum price you are willing to accept
- You control the worst price you will take
- But if the market gaps through that limit, the order may not fill at all
Example:
- Stop price: 90 dollars
- Limit price: 88 dollars
If the next available bid is 85 dollars, your order will sit and wait at 88. You avoid selling too low, but you also risk staying in a dropping stock.
For most beginners, simple stop loss market orders are safer, because they focus on getting you out rather than on getting a perfect price.
How To Set Stop Loss Levels
There is no single perfect rule, but you should always have a reason for your stop location.
1. Percentage of your entry
A common starting point is to risk a fixed percentage from your entry price.
For example:
- 5 to 10 percent for swing trades
- Tighter for day trades
- Wider for volatile growth stocks
2. Technical levels
Many traders set stops based on the chart, such as:
- Below a recent support level
- Below a moving average they use as a trend guide
- Beyond a recent swing low
The idea is to give your trade enough room to breathe, but exit if the market clearly breaks your setup.
3. Based on account risk
Professional traders usually decide how much of their account they are willing to lose on a single trade.
Example:
- Account size: 5,000 dollars
- Max risk per trade: 1 percent = 50 dollars
If your stop is 5 dollars below your entry, your position size would be 10 shares, because 10 times 5 dollars equals 50 dollars.
Common Stop Loss Mistakes
Setting stops too tight
If your stop is just a few cents away from your entry in a volatile stock, normal noise can hit your stop even if the trend is still fine. You get shaken out and watch the stock move in your original direction without you.
Setting stops too wide
If your stop is so far away that a single loss hurts your account badly, you have not really managed risk. Wide stops must be paired with smaller position sizes.
Moving your stop further away
Many traders move stops down when the trade goes against them to avoid taking a loss. This turns a planned small loss into a bigger and bigger one. Once set, a protective stop is meant to protect you, not your ego.
Ignoring liquidity and trading hours
Using market stops on thinly traded stocks, or during pre market and after hours sessions, can lead to ugly fills. In those conditions, a short term price spike can hit your stop far away from the prior price.
Having no plan
The biggest mistake is entering trades without thinking about exits at all. Then stops are placed randomly, or not at all, based on emotion instead of a clear plan.
Conclusion
A stop loss order is one of the most important tools for managing risk. It gives you a predefined exit if a trade moves against you, so a single position does not damage your entire account.
Understanding the difference between stop loss and stop limit orders, thinking carefully about where to place stops, and avoiding common mistakes will make your trading more disciplined and less emotional over time.
If you are building your first portfolio with an app like Gotrade, you can practice good risk management on every trade by planning your maximum loss, your target and your time frame before you invest, instead of reacting to price swings after the fact.
FAQ
1. What is a stop loss order in simple terms?
It is an automatic sell order that triggers when the price reaches a level you choose, to limit how much you can lose on a trade.
2. How is a stop loss order different from a stop limit order?
A stop loss becomes a market order when triggered and focuses on getting you out. A stop limit becomes a limit order and may not fill if the price moves past your limit.
3. Are stop loss orders guaranteed to protect my account?
No. They help manage risk, but gaps, slippage and extreme volatility can still cause larger losses than planned.
Reference:
- Investopedia, How Stop-Loss Orders Help Limit Investment Losses and Risk, 2026.
- Corporate Finance Institute, Stop-Loss Order, 2026.
Disclaimer
Gotrade is the trading name of Gotrade Securities Inc., which is registered with and supervised by the Labuan Financial Services Authority (LFSA). This content is for educational purposes only and does not constitute financial advice. Always do your own research (DYOR) before investing.
