What It Is
A stop loss is a predetermined exit point that limits your loss on a trade. It's an order that automatically closes your position when price reaches a level where your trade thesis is invalidated.
Key insight: A stop loss is not an admission of failure — it's a business expense. Every trade carries risk. The stop loss defines that risk precisely, converting an unknown potential loss into a known, manageable cost. Trading without a stop loss is gambling.
Your stop loss should be placed where your analysis is proven wrong — not at a random distance or at a level dictated by how much you're willing to lose. It should be at a price where the reason you entered the trade no longer exists.
Stop Loss Methods
Place your stop beyond a key support/resistance level, swing high/low, or pattern boundary. If you buy at support, your stop goes below support — where the trade thesis (support holds) is disproven.
Use 1.5-2× ATR below your entry for a volatility-adjusted stop. This accounts for the asset's natural price movement and reduces the chance of being stopped by normal noise.
Always set your stop BEFORE entering the trade. Never widen a stop once placed — that's the discipline breaking. Move stops to breakeven only after price has moved meaningfully in your favor. Trailing stops protect profits but give back some gains.
Apply this concept in combination with others. No single concept tells the whole story - confluence is key.
Continue through core concepts
Compare this reference with related structures and readings before applying it to a live chart.