A stop-loss order is an instruction to exit a position when a security reaches a price you set.

To place a stop-loss order, select the security, choose Stop or Stop Market as the order type, enter the number of shares or contracts, set the stop price, choose the time-in-force, and review the order before submitting it.

For a long stock position, use a sell stop below the current market price. For a short position, use a buy stop above the current market price. When the stop price is reached, a standard stop order becomes a market order. The final execution price may be better or worse than the stop price.

Stop-Loss Orders at a Glance

Order type What happens after the trigger Main advantage Main risk
Stop market Becomes a market order Higher chance of execution Price is not guaranteed
Stop limit Becomes a limit order Sets the worst acceptable price May not execute
Trailing stop The stop price follows the market in a favorable direction Can help protect gains A short-term price move can trigger it

Brokerage firms may use different names, trigger rules, and order availability. Some firms use last-sale prices to trigger stops, while others use quotation prices. Check the order details provided by your broker before submitting the order.

How to Place a Stop-Loss Order

1. Open the Order Ticket

Select the stock, exchange-traded fund, option, or other security in your brokerage account. Then open the trade ticket.

The ticket will usually ask you to choose:

  • Buy or sell
  • Number of shares or contracts
  • Order type
  • Stop price
  • Limit price, if applicable
  • Time-in-force
  • Trading session, if the broker offers that choice

2. Choose the Correct Direction

The order direction depends on your position:

  • You own shares: use a sell stop below the current price.
  • You are short shares: use a buy stop above the current price.

For example, suppose you buy 100 shares at $50 and want to exit if the price falls to about $47.50. The order would include:

  • Quantity: 100 shares
  • Order type: Stop market
  • Stop price: $47.50

If the security reaches the stop price, the order becomes a market order. You might receive $47.50, but you could receive a different price if the market moves quickly or the stock opens lower.

3. Set the Stop Price Based on the Trade Plan

A stop price should mark the point where your trade idea is no longer valid. Choosing the same percentage for every trade can ignore the security's price movement and the reason for entering the position.

Support-Based Stop

Place the stop below a support level, recent swing low, or other price level that would invalidate the trade.

If a stock has repeatedly held near $47, for example, a trader might place the stop somewhat below that level instead of directly on it. The extra distance gives the position more room for ordinary price movement.

Volatility-Based Stop

Use the security's typical price movement to set the distance. One method uses the Average True Range, or ATR:

  • Long position stop: entry price - ATR x multiplier
  • Short position stop: entry price + ATR x multiplier

The multiplier depends on the strategy and security. A volatile stock generally needs more room than a stable stock. A wider stop also increases the potential loss per share.

Maximum-Loss Stop

Set the stop according to the maximum dollar amount you plan to risk. The basic position-sizing formula is:

Number of shares = maximum dollar risk / (entry price - stop price)

Example:

  • Account value: $10,000
  • Maximum planned risk: 1%, or $100
  • Entry price: $50
  • Stop price: $47.50
  • Risk per share: $2.50
  • Position size: $100 / $2.50 = 40 shares

This calculation does not guarantee that the actual loss will stay at $100. Slippage, price gaps, commissions, and other costs can increase the loss.

4. Choose Between Stop Market and Stop Limit

Stop Market Order

A stop market order prioritizes execution. Once triggered, it becomes a market order.

Use it when exiting the position matters more than receiving a specific price. The stop price is a trigger, not a guaranteed sale price. In a fast-moving market, a sell order may execute below the stop price, while a buy order may execute above it.

Stop-Limit Order

A stop-limit order includes two prices:

  1. Stop price: activates the order.
  2. Limit price: sets the worst acceptable execution price.

Example:

  • Stop price: $47.50
  • Limit price: $47.25

When the stock reaches $47.50, the order becomes a limit order that can execute at $47.25 or higher. If the stock falls below $47.25 before a buyer is available, the order may remain unfilled.

A stop-limit order provides price control but does not guarantee an exit. The SEC warns that a stop-limit order may not execute if the market moves away from the limit price.

5. Select the Time-in-Force

Common choices include:

  • Day: The order expires at the end of the trading day if it has not triggered.
  • Good 'til canceled, or GTC: The order remains active according to the broker's rules.
  • Extended-hours instruction: Available only for some securities and order types.

Do not assume that a stop-loss order remains active indefinitely. Brokers can set their own expiration periods and conditions for GTC orders. Extended-hours trading can also involve lower liquidity and greater price movement, and some brokers do not activate stop orders during those sessions.

6. Review and Submit the Order

Before submitting, confirm that:

  • The order is a sell stop for a long position or a buy stop for a short position.
  • The stop price is on the correct side of the current market price.
  • The quantity matches your position.
  • You selected stop market or stop limit deliberately.
  • The time-in-force is correct.
  • The broker's trading-session rules fit your plan.

After submitting the order, check that it appears as open, working, or accepted. Do not assume the order was placed successfully just because you clicked submit.

How Do Trailing Stop-Loss Orders Work?

A trailing stop-loss order uses a dollar amount or percentage instead of one fixed stop price.

For example:

  • You own a stock trading at $100.
  • You set a trailing stop of $5.
  • The initial stop is about $95.
  • If the stock rises to $110, the stop may rise to about $105.
  • If the stock later falls to the trailing stop, the order is triggered.

A trailing stop generally moves in the favorable direction but does not move back when the market reverses. Like a regular stop, it can be triggered by a brief intraday price movement, and the eventual execution price is not guaranteed.

What Are the Main Risks of Stop-Loss Orders?

The Stop Price Is Not a Guaranteed Exit Price

A stop market order can execute below the stop price for a sell order or above the stop price for a buy order. This can happen when prices move quickly or when a stock opens far from its previous close.

Gaps Can Bypass the Stop Price

If a stock closes at $50 and opens at $44 after unexpected news, a sell stop at $47 may trigger near the available market price around $44 instead of at $47.

A Stop-Limit Order May Not Execute

A stop-limit order can prevent a sale below the limit price, but the position may remain open if buyers are unavailable at that price.

Short-Term Volatility Can Trigger the Order

A brief price decline can activate a sell stop even if the stock later recovers. FINRA warns that volatile conditions can cause stop orders to execute at prices materially different from the investor's expectations.

Trading Halts Can Delay Execution

A stop order cannot guarantee an immediate sale during a trading halt or when there is not enough liquidity. Trading halts can occur because of significant news, order imbalances, or other market conditions.

Stop-Loss Order Mistakes to Avoid

  • Placing a sell stop above the current market price.
  • Using the same percentage stop for every security.
  • Placing the stop so close that ordinary price movement triggers it.
  • Placing the stop so far away that the potential loss is unacceptable.
  • Treating the stop price as a guaranteed execution price.
  • Using a stop-limit order without accepting the possibility of no execution.
  • Failing to check whether the order works during extended hours.
  • Moving the stop farther away only to avoid taking a loss.
  • Failing to review open orders after a stock split, dividend, merger, or major position change.

Bottom Line

Set the stop where the trade thesis is no longer valid, then size the position around the distance to that price. Choose a stop market order when leaving the position matters more than price control. Choose a stop-limit order only if you accept that the order may not fill. A stop-loss order can manage risk, but it cannot guarantee a maximum loss.