Stop-Loss Order
A stop-loss order is an instruction that is triggered when a specified price condition is reached. Depending on the order type and market conditions, the eventual execution price can differ materially from the stop price, so a stop does not guarantee a maximum loss.
Frequently Asked Questions
What percentage should a stop-loss use?
There is no universal percentage. A stop level should reflect the instrument's liquidity, volatility, gap risk, time horizon, strategy, position size, and the conditions under which the original thesis is no longer valid. Fixed percentages can be inappropriate across different assets and regimes.
What happens when a stop price is reached?
A stop-market order generally becomes a market order after the trigger, while a stop-limit order becomes a limit order. A stop-market order may fill far from the trigger during gaps or illiquid trading; a stop-limit order may not fill at all. Broker and venue rules vary.
What is a trailing stop?
A trailing stop adjusts the trigger as price moves in the favorable direction according to a stated amount or percentage. It can still be triggered by volatility, gap through the intended level, or fail to execute at the displayed trigger price.
Do stop-loss orders eliminate risk?
No. They may help implement an exit rule, but they do not remove gap risk, liquidity risk, market-impact risk, operational risk, or the possibility of repeated whipsaw losses.