A stop-loss is a pre-set price level at which a trading position is automatically closed to cap losses if the market moves against you. It is the most fundamental risk management tool in trading — without a stop-loss, a single losing trade has no maximum downside, and can potentially wipe out an entire account. Professional traders consider the stop-loss placement the most important decision in any trade, made before entry.
Stop-losses are placed at levels where your trade thesis is invalidated: typically below a key support level (for long positions) or above key resistance (for short positions). Common stop-loss placement methods: Structure-based — below the most recent swing low or support zone; ATR-based — a multiple of the Average True Range (1.5–2x ATR) below entry, accounting for normal volatility; and Percentage-based — a fixed 2–5% below entry regardless of chart structure (less optimal but simple).
The cardinal rule: never move a stop-loss further away to avoid being stopped out. This converts a planned small loss into a potentially catastrophic one. Stop-losses can be moved in your favour (trailing stop) once the trade is profitable, locking in gains while allowing further upside. Most exchanges support both fixed stop orders and trailing stops natively.
Example: A trader buys ETH at $3,200 after it bounces from $3,100 support. Stop-loss placed at $3,050 (below support, $150 risk). If ETH breaks below $3,050, the position closes automatically for a $150 loss — protecting the trader from a potentially much larger downside move.
Learn more: Investopedia — Stop-Loss Orders Explained
