Risk & volatility

Stop-loss

Stop-loss is a planned exit from a position if its price reaches a specified threshold, intended to limit losses but unable to guarantee a maximum loss or an execution price.

Calculate it: Position Size Calculator for Stocks →

What it means

A stop-loss identifies a price at which a position is intended to be closed if the market moves against it. The term can describe a planned exit level or an order placed with a broker; a level written in a trading plan does nothing by itself. For a long stock position, the stop price is generally below the entry price. For a short position, it is generally above the entry price.

The order type matters. A sell stop order for a long position typically becomes a market order when its stop price is triggered. It may fill below that price. A sell stop-limit order sets a minimum acceptable sale price, but it may not fill at all. Broker rules, trading hours, and the prices used to trigger an order can differ.

How it is calculated

For a long stock position, the planned loss at the stop level is planned loss (US$) = (entry price − stop price) × number of shares.

  • Entry price: the price paid per share, in US$ per share.
  • Stop price: the planned trigger price, in US$ per share—not a guaranteed sale price.
  • Number of shares: the position size, in shares.

For a short position, reverse the price difference: (stop price − entry price) × number of shares. These calculations exclude commissions, spread, market impact, and any difference between the stop price and the actual fill price. A percentage distance for a long position is (entry price − stop price) ÷ entry price × 100%.

Worked example

Suppose, hypothetically, an investor buys 100 shares at US$50 each and sets a sell stop at US$45.

  1. The planned price difference is US$50 − US$45 = US$5 per share.
  2. The planned loss at the stop price is US$5 × 100 = US$500, before trading costs.
  3. The stop is 10% below the entry price: US$5 ÷ US$50 × 100% = 10%.

If the stop triggers but the shares fill at US$43, the price loss is instead (US$50 − US$43) × 100 = US$700, before trading costs. The US$45 level was a trigger, not a promise of a US$45 fill. If a stop-limit order used US$45 as its limit and the market stayed below it, the position might remain open.

Why it matters before you trade

A stop-loss level makes an intended exit and its approximate price risk visible before an order is placed. Together with position size, it shows how much of a portfolio could be lost if execution occurs at that level. That conditional calculation is not a maximum-loss guarantee.

Volatility can cause a stop to trigger during an ordinary price swing. An overnight gap, trading halt, or thin market can make the eventual fill materially different from the stop price. A stop-limit order introduces a different risk: the order can remain unfilled while the price continues to move. A pre-trade check can therefore consider both the planned loss and what happens if execution is delayed or occurs at a worse price.

How PreTrAIde uses it

PreTrAIde is an AI platform for pre-trade analysis of stock baskets. Users specify each stock's side, quantity, and execution conditions. The product facts do not establish that PreTrAIde places, monitors, or enforces stop-loss orders, or that it calculates a dedicated stop-loss metric. It never receives, transmits, or executes an order; users trade through their own brokers.

Its analysis provides basket-level and line-level GO, NO-GO, or MODIFY verdicts, risk assessments, suggested execution strategies, and reasoning. Its quantitative layer estimates factors such as spread, market impact, daily volatility, and one-day 95% value at risk. Those estimates can inform a pre-trade review of execution and risk, but none makes a stop price a guaranteed exit price. Verdicts are decision support, not recommendations.

Common mistakes

  • Treating the trigger as the fill: A stop order can execute at a worse price, particularly after a gap.
  • Confusing stop and stop-limit orders: A limit can constrain the sale price but cannot ensure a fill.
  • Calling planned loss maximum loss: The formula assumes a fill at the stop price and omits trading costs.
  • Ignoring position size: The same per-share stop distance produces different dollar losses for different share counts.
  • Assuming constant protection: Trading halts, market hours, and broker-specific order rules can affect when an order triggers or executes.

Frequently asked questions

Does a stop-loss guarantee the price I will receive?

No. A stop order typically becomes a market order when triggered, so its fill may be worse than the stop price. A stop-limit order can avoid a fill outside its limit but may not fill.

How do I calculate the planned loss at a stop-loss?

For a long stock position, subtract the stop price from the entry price and multiply by the number of shares. The result assumes a fill at the stop price and excludes trading costs.

What happens to a stop-loss if a stock gaps below the stop price?

A triggered sell stop order may fill at a price below the stop. A sell stop-limit order may remain unfilled if its limit price is unavailable.

Related terms

Stop order Stop order is an instruction that becomes a market order when a specified stop price is reached, so its execution price can differ from the stop price. Stop-limit order Stop-limit order is an instruction that, once a specified stop price is reached, becomes a limit order that can execute only at its limit price or better. Trailing stop Trailing stop is a stop order whose trigger follows a favorable price move by a fixed amount or percentage but does not move back when the price reverses. Gap risk Gap risk is the possibility that a stock’s next available trading price jumps above or below its previous price, causing a fill or loss beyond the level expected. Position sizing Position sizing is the process of deciding how many shares to hold or trade based on available capital, intended portfolio weight and the amount of risk an investor is prepared to take. Slippage Slippage is the difference between a trade’s expected price and its actual fill price, expressed per share, as a percentage or in total dollars.

Risk & volatility

Volatility Historical volatility Implied volatility Annualized volatility Daily volatility Parkinson volatility estimator Yang-Zhang volatility estimator GARCH model All glossary terms →

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Educational content, not investment advice. PreTrAIde is analysis software, not a broker: it never executes orders, and its verdicts are decision support, not recommendations to buy or sell.