Setting a Stop-Loss

A stop-loss caps how much a trade can lose, decided before you enter — not in the heat of the moment.

Setting a stop before you enter

A stop-loss is a predetermined price where a position closes if the trade moves against you. Deciding an exit while already losing tends to produce worse decisions — hope creeps in, and the exit point quietly drifts further away as the loss grows. Setting the stop in advance, based on the stock's own volatility, removes that decision from the emotional pressure of an active loss.

A worked example using ATR

You buy XYZ at $60. From the previous module, XYZ has a 14-day ATR of $2.00. Using a 2x ATR stop:

The stop sits below a level that reflects XYZ's normal daily movement — close enough to limit the loss, far enough that ordinary noise doesn't trigger it on a move that isn't a real reversal.

A hard stop is a standing order with your broker that triggers automatically at that price. A mental stop is a level you've decided on but haven't submitted as an order, closing the position by hand if it's reached. A hard stop removes the temptation to second-guess the plan mid-trade; a mental stop is more flexible but depends entirely on follow-through.

Key takeaway: A stop-loss caps risk in the typical case — it isn't an absolute guarantee, since a stock can gap down overnight past the stop and execute the exit at a worse price.

With the downside capped, the next lesson sets the other half of the plan: a profit target.

This lesson is educational content explaining standard trade-management concepts, not personalized investment or trading advice.