Stop-Loss Orders Explained: How to Set Them the Right Way (With Examples)

Updated October 2026 · 11 min read

Every trader has a story about the one that got away. A stock drops 5%, and they decide to wait for it to bounce back. It drops 15%, and now selling feels like admitting defeat. A few weeks later it's down 40%, and a small mistake has turned into a painful lesson.

A stop-loss order is the simplest tool for preventing that story. It decides your exit before emotions get a vote. But a stop-loss set in the wrong place, or with the wrong order type, can sell you out at the worst possible moment.

This guide explains how stop-loss orders work, the three main types, four practical ways to decide where to place your stop, and the hidden risks most beginners don't learn about until it costs them money.

Key takeaways

A stop-loss order sells your shares automatically once the price falls to a level you choose.
Your stop price is a trigger, not a guarantee. In a fast drop or an overnight gap, you can sell well below it.
Place stops based on the chart and the stock's normal volatility, then size your position so the loss stays small.
With a 2:1 reward-to-risk ratio, you only need to win about one trade in three to break even.

In this guide:

What is a stop-loss order?
Stop vs. stop-limit vs. trailing stop
4 ways to decide where to set your stop
Pairing stops with a reward-to-risk ratio
The hidden risks of stop-loss orders
6 stop-loss mistakes to avoid
Should long-term investors use stop-losses?
How to set a stop-loss, step by step
Frequently asked questions

What Is a Stop-Loss Order?

A stop-loss order is an instruction to your broker to sell a stock if its price falls to a specific level, called the stop price. Until the stock reaches that price, nothing happens. Once it does, the stop order becomes a market order and sells at the next available price (Investor.gov).

Think of it like a smoke detector for your portfolio. Most days it sits quietly in the background. When something goes wrong, it acts immediately, even if you're asleep, at work, or not checking your phone.

A Simple Example

You buy 50 shares of a company at $40, investing $2,000. You decide you're willing to lose about 10%, so you place a stop-loss at $36.

If the stock rises to $48, your stop never triggers. You still own the shares, now worth $2,400.
If the stock falls to $36, your stop triggers and your shares are sold at roughly $36. Your loss is about $200 (50 shares × $4), and your remaining $1,800 is safe in cash.

Without the stop, you'd have to watch the price yourself and make the decision in the moment, which is exactly when fear and hope make decisions hardest.

Stop vs. Stop-Limit vs. Trailing Stop

There are three main kinds of stop orders. Each one handles the trade-off between "get me out for sure" and "get me out at a fair price" differently.

Order type	When the stop price is hit	Main strength	Main weakness
Stop (stop-loss)	Becomes a market order	You will almost always get out	The sale price can be far below your stop
Stop-limit	Becomes a limit order at your chosen minimum price	You won't sell below your limit	You may not sell at all if the price drops past your limit
Trailing stop	Stop price rises with the stock and becomes a market order when hit	Locks in gains automatically	Normal pullbacks can trigger it too early

Stop-Limit in Action

Using the earlier example, you set a stop-limit order with a stop at $36 and a limit at $35.50. If the stock slides gradually through $36, your shares sell somewhere between $36 and $35.50.

But suppose bad news comes out overnight and the stock opens at $33. Your order activates, but no buyer will pay $35.50 or more. Your order sits unfilled, and you still own a stock that's now down 17.5%. A stop-limit protects your price at the cost of possibly not protecting you at all.

Trailing Stop in Action

A trailing stop follows the price up but never down. Say you buy a stock at $50 and set a 10% trailing stop:

Stock price	Highest price so far	Trailing stop (10% below high)	What happens
$50	$50	$45.00	You buy
$60	$60	$54.00	Stop rises
$57	$60	$54.00	Stop stays put
$65	$65	$58.50	Stop rises again
$58.50	$65	$58.50	Sold, about $8.50 per share profit

You never had to decide when to take profits. The trailing stop did it for you, and you kept most of the gain. The downside: if the stock had dipped 10% on a bad day before continuing to $80, you'd have been shaken out early.

4 Ways to Decide Where to Set Your Stop

The hardest part of using a stop-loss isn't placing the order. It's choosing the price. Set it too tight and normal daily wiggles knock you out. Set it too loose and your losses grow larger than they need to be. Here are four common methods.

1. The Percentage Method

Pick a fixed percentage below your purchase price, such as 7% or 10%. It's simple and easy to follow, which makes it popular with beginners.

The weakness: a 7% stop might be far too tight for a volatile tech stock that moves 4% on an ordinary day, and too loose for a steady utility stock that rarely moves 1%. One number doesn't fit every stock.

2. The Support Level Method

A support level is a price where a stock has repeatedly stopped falling and bounced back up. Buyers tend to step in there. Many traders place their stop slightly below support, because if the price breaks through it, the reason for owning the stock may no longer hold.

Example: A stock trades at $52, and over the past three months it has bounced off $48 three times. Instead of a stop at exactly $48, where many other traders' stops are likely clustered, you might place it at $47.40, a little below the obvious level.

3. The Volatility (ATR) Method

The Average True Range (ATR) measures how much a stock typically moves in a day. Most charting tools and broker platforms can display it. Setting your stop at a multiple of ATR, often 1.5 to 3 times, gives the stock room to move normally.

Example: A stock trades at $80, and its 14-day ATR is $2.50. A stop at 2 × ATR sits $5 below the price, at $75. If the stock becomes more volatile and ATR rises to $4, the same rule widens the stop to $72.

4. The Fixed-Dollar Risk Method

This method starts with how much money you're willing to lose, then works backward. It pairs naturally with the 1% to 2% rule covered in our guide to starting stock trading.

Example: You have a $10,000 account and risk 1% per trade, which is $100. Using the support method, your stop is $3 below your entry. You buy $100 ÷ $3 = 33 shares. If the stop were $5 below entry, you'd buy only 20 shares. The stop goes where the chart says; the position size adjusts to keep the dollar risk the same.

Method	Best for	Watch out for
Percentage	Beginners who want a simple rule	Ignores how volatile each stock is
Support level	Traders who read basic charts	Obvious levels attract crowded stops
Volatility (ATR)	Volatile stocks and changing markets	Wider stops mean smaller positions
Fixed-dollar risk	Combining with any method above	Never move the stop just to fit a bigger position

In practice, many traders combine methods: they choose the stop price from support or ATR, then use fixed-dollar risk to decide how many shares to buy.

Pairing Stops With a Reward-to-Risk Ratio

A stop-loss tells you how much you could lose. A price target tells you how much you hope to make. Comparing the two gives you the reward-to-risk ratio.

Example: You buy at $50 with a stop at $47 (risk: $3) and a target of $56 (reward: $6). That's a 2:1 reward-to-risk ratio.

Here's why this matters. The better your ratio, the fewer trades you need to win to break even:

Reward-to-risk ratio	Win rate needed to break even	Result of 10 trades at 40% win rate ($100 risk each)
1:1	50.0%	−$200
2:1	33.3%	+$200
3:1	25.0%	+$600

Simplified example. Ignores trading costs, taxes and slippage.

With a 2:1 ratio, you can be wrong six times out of ten and still come out ahead. That's the real power of a stop-loss: it keeps your losers small enough that a modest number of winners can carry the account.

The Hidden Risks of Stop-Loss Orders

A stop-loss is useful, but it's not a force field. Knowing its limits helps you avoid nasty surprises.

Gap Risk

Stocks can "gap" between trading sessions, opening far from where they closed. This often happens after an earnings report or major news. Because a regular stop becomes a market order, it sells at the first available price, which might be well below your stop.

Example: You own 50 shares bought at $40, with a stop at $36. The company misses earnings after the close, and the stock opens the next morning at $33. Your stop sells near $33, not $36. Your planned $200 loss becomes about $350.

Fast-Market Risk

In a sudden market-wide plunge, prices can drop faster than buyers can step in. On August 24, 2015, US markets saw 1,278 trading halts in 471 securities, and the SPDR S&P 500 ETF (SPY) fell 7.8% below the prior day's close within minutes of the open (SEC staff research note). Stop orders triggered in moments like that can sell at prices far below what anyone expected.

Other Things to Check With Your Broker

Trigger method. Some brokers trigger stops based on the last trade price; others use the bid or ask quote. This can affect when your order fires (Investor.gov).
Trading sessions. Many brokers only activate stop orders during regular market hours, not in pre-market or after-hours trading.
Order duration. A "day" order expires at the close. A "good-'til-canceled" (GTC) order stays active longer, though many brokers cancel GTC orders after 60 to 180 days.

6 Stop-Loss Mistakes to Avoid

Moving your stop lower. When the price approaches your stop, it's tempting to give it "a little more room." This defeats the purpose. Only ever move a stop up, never down.
Setting stops too tight. A stop just 2% below entry on a stock that swings 3% a day is almost guaranteed to trigger on noise.
Using obvious round numbers. Stops cluster at levels like $50 or $100. Placing yours slightly away from them can reduce the chance of being caught in a quick dip.
Forgetting the order expired. A day order disappears at the close. Check that your stop is still active, especially after a few weeks.
Holding stops through earnings without a plan. Decide in advance whether to hold, reduce or exit before a report, because a gap can jump straight past your stop.
Not using a stop at all. A mental stop only works if you follow it. Under pressure, most people don't.

Should Long-Term Investors Use Stop-Losses?

Stop-losses are mainly a trading tool. For a long-term investor holding broad index funds, they can do more harm than good.

Markets regularly fall 10% or more before recovering. A stop-loss on an S&P 500 fund could sell your shares during a routine correction, leaving you in cash right before the rebound. If you're investing for retirement 20 or 30 years away, a diversified portfolio and the discipline to hold through downturns usually protect you better than an automatic sell order.

Stop-losses make more sense for individual stocks, especially smaller or more speculative ones, where a big drop may signal a real problem rather than normal market noise.

How to Set a Stop-Loss, Step by Step

The exact screens differ by broker, but the process is almost always the same:

Choose your stop price first. Use support, ATR or a percentage, and write it down before you buy.
Calculate your position size. Divide the dollar amount you're willing to risk by the distance from your entry to your stop.
Buy the shares. Use a limit order so you control your entry price.
Open a sell order. Select the stock, choose "Sell," and enter the number of shares you own.
Pick the order type. Choose "Stop," "Stop-limit," or "Trailing stop," and enter your stop price (and limit price or trail amount, if needed).
Set the duration. Choose "Good-'til-canceled" so the order doesn't expire at the close, and note when your broker will cancel it.
Review and confirm. Double-check the stop price. A typo like $3.60 instead of $36 makes the order useless.

Frequently Asked Questions

What is a good stop-loss percentage?

There's no single right number. Many short-term traders use stops between 5% and 10%, but the better approach is to base your stop on the stock's volatility and chart, then adjust your position size so the dollar loss stays within your limit.

Do stop-loss orders cost money?

Most major brokers don't charge extra to place a stop order, and online stock trades are typically commission-free. You'll still face the bid-ask spread when the order executes, plus any slippage in a fast market.

Can a stop-loss guarantee my maximum loss?

No. A regular stop guarantees that your order will trigger, not the price you'll get. Gaps and fast markets can push the sale price well below your stop. Some brokers offer guaranteed stops on certain products for a fee, but they are uncommon for regular US stock trading.

Should I use a stop or a stop-limit order?

If getting out matters more than the exact price, use a regular stop. If you'd rather keep the shares than sell at a terrible price, use a stop-limit, and accept that it may not fill during a sharp drop.

Can I use a stop order to buy a stock?

Yes. A buy stop is placed above the current price. Traders use it to enter a position only if the stock breaks above a certain level, or to limit losses on a short sale.

The Bottom Line

A stop-loss order turns your exit plan into an automatic decision. Used well, it keeps small losses from becoming large ones, which is the foundation of every lasting trading strategy.

Choose your stop based on how the stock actually moves, size your position so a stopped-out trade costs only a small slice of your account, and aim for trades where the potential reward is at least twice the risk. Just remember that a stop price is a trigger, not a promise, and plan for gaps around earnings and big news.

Disclaimer: This article is for educational purposes only and is not financial advice. Trading involves risk, including the loss of principal. Stop orders do not guarantee execution at a specific price. Consider your own situation or consult a licensed financial professional before trading.

Sources

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