What is a stop loss? How stop-loss orders work, with examples
A stop loss is an order that automatically sells your position when the price falls to a level you choose, so a losing trade can’t keep getting worse. You set the stop price in advance, and the broker or exchange executes the sale for you, even when you are not watching the market.
It is one of the most useful risk management tools for traders. The catch: a stop loss limits losses, but it doesn’t fix your exit price, and in fast-moving markets you can be sold at a worse price than you set.
What is a stop loss?
A stop loss is an order to sell an asset once its price drops to a specified stop price. Until then, the order waits. When the market price reaches the stop price, the stop loss triggers and becomes a market order, which sells at the next available market price. In other words, the stop price is a trigger price set below the current market price: once the order is triggered, it sells at the prevailing market price, whatever that is at that moment.
For a short position, it works the other way round: a buy stop closes the trade if the price rises too far. So a stop order can be an order to buy or sell, depending on your position. Stop-loss orders work for both long and short positions, on stocks, ETFs, forex, futures and crypto.
The point is to decide your maximum acceptable loss before you trade, when you are calm, rather than in the middle of a crash.
How a stop-loss order works: an example
Say you buy 20 shares at an entry price of €50, an initial investment of €1,000. You decide you don’t want to lose more than about €100, so you place a stop loss order at €45, 10% below your purchase price.
- The price rises. Nothing happens; your shares keep their gains.
- The stock price drops to €45. The stop loss triggers, becomes a market order, and sells your 20 shares at roughly €45. You get back about €900, a loss of about €100 plus trading fees.
- The stock gaps. The share closes at €46 on Friday, and bad news comes out over the weekend, so the stock falls before anyone can trade. On Monday it opens at €40. Your stop triggers at the open, but the next available price is €40, so you get about €800. The stop loss still limited the damage, but not to €100.
That last case is the most important thing to understand. A price gap or a sharp move in volatile markets means your execution price can be well below your stop price. This is slippage, and it is common in crypto, where markets trade around the clock and can drop several percent in minutes.
Stop losses in crypto markets
Unlike stocks, crypto has no market hours, so there are no weekend gaps, but there are sudden drops. A stop on a small token can fill far below the stop price if the order book is thin, and a short dip, when many market participants sell at once, can trigger your stop just before the price recovers. Wider stops and smaller positions help with both.
The difference between a stop loss and a stop limit order
The difference between a stop loss and a stop-limit order is what happens after the trigger. A stop loss becomes a market order; a stop limit order becomes a limit order, with a limit price below which it will not sell.
| Stop loss (stop-market) | Stop limit | |
|---|---|---|
| What you set | A stop price | A stop price and a limit price |
| After the trigger | Sells at the market price | Sells only at the limit price or better |
| If the price gaps | Sells, at a worse price | May not sell at all |
| Best for | Making sure you get out | Avoiding a fill at a terrible price |
A stop-limit order uses two price points: the stop price that triggers it and a specified limit price, the worst price you accept. Using the example above: a stop limit with a stop at €45 and a limit at €44 would sell in a gentle fall. But if the share opens at €40, the order doesn’t fill, and you still hold shares that are falling. Stop limit orders guarantee a price, not an exit, while a stop loss guarantees an exit, not a price.
Trailing stops: a stop that moves up
A trailing stop follows the price up and stays a fixed distance below it, as a percentage or an amount. If you buy at €50 with a 10% trailing stop, the stop starts at €45. If the stock rises to €60, the stop moves up to €54. If the price then falls to €54, you sell, keeping most of the gain.
A trailing stop helps you secure gains without picking a top. It never moves down, so it can only lock in more of the trade as the trade moves your way. Many traders pair a trailing stop, or a fixed stop, with a take profit order that sells at a target price above the market (see our page on take-profit orders).
Managing risk: how to set a stop loss
Most trading strategies and trading systems use a stop loss order on every position. There is no perfect stop loss strategy, and past results say nothing about future performance, but good ones share a few rules:
- Decide what “wrong” looks like. Place the stop at a price that would show your reason for the trade no longer holds, for example below a recent low, rather than at a random round number.
- Size the position from the stop. If you are willing to lose €50 on a trade and your stop is 10% below the entry point, the position should be about €500. This kind of money management keeps one bad trade from hurting your whole account.
- Leave room for normal price movements. A stop that is too tight gets hit by everyday market fluctuations, especially during market volatility. Review your stops when market conditions change. Crypto usually needs a wider stop than a large stock or ETF.
- Don’t move your stop loss price down. Moving a stop further away when the price approaches it turns a planned loss into a bigger, unplanned one.
Placing a stop loss order is typically free: you pay the normal trading fee only when the order fills, plus the bid-ask spread. Our overview of order types explains how stop orders fit next to market and limit orders, and our page on risk management covers position sizing in more detail.
Stop losses for long-term investors
Long term investors often don’t need stop-loss orders. Investing involves risk either way, but the risk for a long-term saver is different. If you invest €100 a month in a broad ETF for 20 years, a stop loss could sell your whole holding during a temporary crash, just before the market recovers, and turn a paper loss into a real one.
Stop losses make more sense for single shares, active trades and anything bought with leverage. For a diversified long-term portfolio, a sensible investment strategy and the right asset mix do more to manage downside risk than a stop on each holding.
Stop losses with leverage and CFDs
With leverage, a stop loss is close to essential, but it isn’t a full safety net. A leveraged position can lose your whole deposit after a price move that a stop can’t catch in time. Most retail traders lose money with CFDs and other leveraged products. At eToro, for example, 55% of retail CFD accounts lose money, according to its own website (see our eToro review).
In the EU, retail CFD accounts have some protection built in: brokers must close positions when your margin falls to half of the required level, and you can’t lose more than the money in your account. That limits the worst case, but it doesn’t make leverage a good idea for beginners.
The bottom line
A stop loss automatically sells when the price falls to a level you set, so you decide your maximum loss before you trade. It caps the damage in a normal decline but not in a gap or crash, when it fills at the next available price. Use stop losses for active and leveraged trades, size each position from the stop, and think twice before putting one on a long-term ETF plan.
Questions people ask
Is setting a stop loss a good idea?
For active traders and anyone using leverage, usually yes, because it caps the loss on each trade. For long-term investors buying ETFs every month, a stop loss can sell you out during a temporary dip, so many don't use one.
What is the 7% rule for stop loss?
It is a rule of thumb from stock trading: sell a share if it falls about 7% to 8% below what you paid. It is a starting point, not a law. Volatile assets such as crypto often need a wider stop, or you get stopped out by normal price swings.
Does a stop loss guarantee my price?
No. A standard stop loss becomes a market order once triggered, so in a fast fall or a price gap it can fill well below your stop price. A stop-limit order sets a minimum price, but then it may not fill at all.
Do I pay extra for a stop-loss order?
Usually not. Most brokers and exchanges charge the normal trading fee when the stop order fills, and nothing for placing it. Check your platform's fee page to be sure.
Where should I set my stop loss?
Set it at a level that means you were wrong about the trade, such as below a recent low, and size the position so that hitting the stop costs only an amount you can accept, for example 1% to 2% of your account.