What Is a Stop Loss? Definition & Example

A stop loss is an instruction to exit a position automatically once price reaches a level you choose in advance. Its purpose is not to be clever about exits — it is to make sure that the decision about how much a trade can cost you is made calmly, before you are in it, rather than emotionally while you are losing money.

Placement should follow the chart, not your wallet. A stop belongs at the price that invalidates your reason for being in the trade — below structural support for a long, above resistance for a short. Placing it at "the most I feel like losing" guarantees it sits at an arbitrary price with no relationship to how the asset actually moves, and it will be hit by ordinary noise.

Once the stop is placed, position size follows from it rather than the other way round. Risk a fixed percentage of your account, divide by the distance to the stop, and the correct position size falls out. That ordering — stop first, size second — is what makes results comparable across trades, and it is what the position size calculator does.

On leveraged positions there is a hard constraint people miss: your stop must sit closer to entry than your liquidation price. If liquidation comes first, the stop is decorative — the exchange closes you at a worse price and charges a liquidation fee. High leverage narrows the window until the two collide.

Two mechanical notes. A stop-market order guarantees execution but not price, and in a fast move can fill meaningfully worse than the trigger. A stop-limit guarantees price but not execution, and can leave you in a position you meant to exit. Neither is universally correct — in a genuine crash, the stop-market fill you dislike is usually the better outcome.