Stop-Loss

A stop-loss is a predetermined price at which a position gets closed if a trade moves against expectations, set in advance rather than decided in the moment. Its purpose is to cap how much a single trade can lose before it's ever entered. A hard stop is placed as a standing order with a broker, triggering automatically once the price is reached; a mental stop is a level a trader has decided on without submitting an order, relying on manually closing the position instead. Stops are often sized using ATR (Average True Range, a common measure of how much a stock typically moves in a day), so the distance reflects a specific stock's normal volatility rather than one arbitrary percentage applied to every trade. A stop-loss limits risk only under normal trading conditions — a stock can gap down sharply overnight, past the stop price, and execute at a worse level than the stop itself, so a stop caps risk in the typical case without being an absolute guarantee against a larger loss in an extreme, fast-moving situation.