# 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.

## 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.

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Source: https://pretraide.com/glossary/stop-loss