A stop loss closes the position automatically at a price you set in advance, turning an open-ended loss into a known one.
The critical condition is that it is set before entry. Once the price has moved against you the decision becomes emotional, and the temptation is to postpone the exit in the hope of a rebound — the usual path to a large loss.
Two limits to note:
- When a market opens with a price gap, the stop is executed at the first available price, not the level you set.
- A stop placed too close to your entry may close the position on ordinary noise before the move becomes clear.