An order that automatically closes your trade at a predetermined price to limit losses.
A stop loss is a protective order placed at a specific price level. If the market reaches that price, your position is automatically closed, preventing further losses. Stop losses can be placed as fixed orders with your broker or managed mentally (though automated stops are strongly preferred). The distance between your entry and stop loss defines your risk on the trade.
Stop losses are non-negotiable in professional trading. Without one, a single trade can destroy your account. They remove emotion from the exit decision, enforce discipline, and make risk calculable. Your stop loss distance directly determines your position size.
You buy a stock at $50 and place a stop loss at $47. If price drops to $47, your position is automatically sold. Your maximum risk is $3 per share. With 100 shares, your total risk is $300.
A stop loss at $47 automatically closes the trade if price drops $3 from the $50 entry, limiting the loss.