Definition
Stop-loss orders automatically exit a position when the price drops to a predetermined level, preventing larger losses. Fixed stop-losses use a set price, trailing stops adjust upward with price movement, and volatility-based stops use ATR multiples. Mental stops (without actual orders) risk failure during emotional market conditions.
lightbulb Example
Buy stock at $100 with a 7% stop-loss at $93. If the stock drops to $93, the position is automatically sold, limiting the loss to $7 per share. A trailing stop at $5 would follow the price upward: if the stock reaches $120, the stop moves to $115.
verified_user Key Points
- Limits maximum loss on a position
- Fixed, trailing, and volatility-based types
- Trailing stops lock in profits as price rises
- Gap risk: stock can open below stop level