Stop loss
A stop loss is an order that exits a position if price reaches a set level against you. It limits the loss on a trade, though not to exactly the stop price.
How Stop loss is calculated
Common placements: a fixed percent below entry, a multiple of ATR below entry, or beyond a recent swing low. A stop order becomes a market order when triggered, so the fill can be worse than the stop price. If price gaps past the stop overnight, the fill is at the next available price.
How it is read
The stop sets the risk per share, which sets the position size. A tight stop gives a small loss per trade and more stops. A wide stop gives fewer stops and a larger loss each time.
Common mistakes
- Moving the stop further away once price approaches it.
- Placing it at an obvious round number or exact prior low where many others are.
- Assuming the loss is capped at the stop. A gap or a thin market can carry the fill well past it.
Test it yourself
Set a stop percent in the exit section of the rule. The Lab fills at the stop, or at the open if price gaps through it. The Lab charges trading costs on every trade, fills on the next day's open, and shows how many attempts you have made.
What Tickfloor tested
Tickfloor has not published a backtest of a rule built only on Stop loss. It describes or manages something rather than giving a signal, so there is no strategy to score. It still shapes how any tested rule should be read.
Lessons that cover it
- Stop losses and take profits
- Protective puts: insurance a gap cannot skip
- Win rate is not the goal: breakeven stops and partial exits
- ATR, Bollinger Bands and volatility-based stops
Related concepts
General information only. It doesn't consider your objectives, finances or needs. Tickfloor holds no financial services licence and never places trades.