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Stop loss: what it is, where it goes and how the math works

InteractivePick the entry day yourselfOne click on a session of the real chart: the page draws the two stops, measures the distances and tells you what happened next.Try it →

The stop loss on a real stock: Disney, 2024

Open in the chart
Risk management · the order that closes a position at a level decided in advance
Stop loss
Disney: entry at the close of · sessions from to · adjusted prices
volumeperiod start 88.91stop below the low $103.73swing lowstop at 2 × ATR $105.45entrygap120.3987.5292.26Jan 2, 2024Feb 23, 2024Apr 17, 2024Jun 7, 2024Jul 31, 2024
Entry$109.73Stop below the swing low$103.73ATR(14)$2.14Stop at 2 × ATR$105.45

March 1, 2024: Disney closes at $109.73. The last swing low is the one of February 23, 2024, $103.73: the distance down to it is $6.00 (−5.5%). The 14-session ATR is $2.14: at 2 ATRs from the close the stop falls at $105.45, $4.28 lower (−3.9%).

Afterwards. Stop below the low: hit on May 7, 2024, 46 sessions after entry. No gap: the order triggers at its level, $103.73. Stop at 2 × ATR: on May 7, 2024, 46 sessions after entry, the stock opens at $105.12, already below the stop: the order fills at the open, $0.33 below the chosen level.

−5.5% from the entry to the stop below the swing low −3.9% with the stop at 2 × ATR

What a stop loss is, and what it is not

Fig. 1 · Anatomy of a stop loss

risk per sharelast swing lowentrythe stop closes the positionentrystop loss
  • A stop loss is an order: it closes the position if the price reaches a level decided before entering.
  • The level is chosen on the chart, where the idea behind the trade no longer holds: here, just below the last swing low.
  • The distance between entry and stop is the risk per share: the whole position math starts there.
  • As long as the price stays above it, the order does nothing.

Fig. 2 · The gap: a stop is not a guarantee

stop lossslippageopens below the stop: filled hereclose of the session before
  • Once the level is touched, the stop becomes a market sell order: it fills at the first available price.
  • If the stock already opens below the stop, the first available price is the open: lower.
  • The difference between the stop level and the filled price is called slippage.
  • That is why a stop limits the loss but does not fix it to the cent.

Fig. 3 · On the short side everything mirrors

risk per sharelast swing highshort entrystop loss
  • A short seller loses when the price rises: the stop sits above, not below.
  • The technical level is the last swing high, or a resistance level.
  • The risk per share is stop minus entry, and the share count works the same way.

Where technical analysis places the stop loss

five ways, and the chart decides which one makes sense
stop loss

1Below the last swing low

  • the low the price bounced from: if the price breaks it, the sequence of higher lows is over
  • the order sits just below the low, not on it: an exact return to the level does not trigger it

Disney: low of at $103.73

supportstop loss

2Below a support level

  • a support level is a price where the stock has stopped falling more than once
  • below the support the idea of a bounce no longer holds
stop loss

3Below the trendline

  • the trendline rises: the stop rises with it, session after session
  • what counts is a close below the line, usually with a filter
ATR2 × ATR

4At a volatility distance (ATR)

  • Wilder’s ATR is the average range of one session, gaps included
  • stop = entry − 2 × ATR: wide on a nervous stock, tight on a calm one

Disney, : ATR $2.14, stop at $105.45

−5%stop loss

5At a fixed percentage

  • always the same distance, for example 5% below the entry
  • simple, but it does not look at the chart: 5% is a lot for a calm stock and little for a nervous one

Deeper dives: support and resistance · the trendline.

Too tight, too wide: the distance of the stop loss

Fig. 4 · Too tight

entrystop hitthen the rally goes onstop loss
  • A stop a few cents from the entry sits inside everyday swings.
  • A normal pullback is enough to trigger it, even if the trend stays intact.
  • Each loss is small; the number of times it triggers is not. The ATR is the yardstick of those swings.

Fig. 5 · Too wide

loss per shareentrythe stop triggers herestop loss
  • A far stop rarely triggers: the price has room to swing.
  • When it does trigger, though, the loss per share is large.
  • For the same risk in money, a wide stop means fewer shares: the math is further down.
true range = the largest of: high − low  ·  |high − previous close|  ·  |low − previous close|
today’s ATR(14) = (yesterday’s ATR × 13 + today’s true range) / 14  ·  the first ATR is the simple average of the first 14 true ranges
volatility stop = entry − multiple × ATR
The ATR and the two stops of Disney on , step by step
StepCalculationResult
High − low109.93 − 108.83$1.10
|High − previous close||109.93 − 109.37|$0.56
|Low − previous close||108.83 − 109.37|$0.54
True rangethe largest of the three$1.10
ATR(14)(2.22 × 13 + 1.10) / 14$2.14
Stop at 2 × ATR109.73 − 2 × 2.14$105.45
Stop below the swing lowthe low of $103.73

Interactive exercisePick the entry day yourself

Disney, the whole of 2024: the same rules as this page
  1. Click a session on the chart: that is the day you enter, at the closing price.
  2. The page finds the last swing low and measures that day’s ATR: out come the two stops.
  3. Read the distances in money and in percent, and what happened next. Then take the numbers to the calculator.
Click here on the chart: pick the entry day

No day picked yet: move the mouse over the chart, the circle marks the close of the session that will be picked.

How many shares: the stop loss and position sizing

Fig. 6 · Same maximum loss, two different stops

entry$0.50 per sharestop loss400 shares$200CLOSE STOP: MANY SHARESentry$2.00 per sharestop loss100 shares$200FAR STOP: FEW SHARES
  • First you decide how much you accept to lose on the trade, in money.
  • Then you divide by the risk per share (entry minus stop): out comes the number of shares.
  • Close stop: more shares. Far stop: fewer shares. The area, that is the maximum loss, is the same.
  • The number of shares is always rounded down.

The 2 percent rule is an example of a rule: on any single trade the maximum accepted loss does not exceed 2% of the capital. It is a textbook convention, not a law: some use 1%, some less. The rest is arithmetic: position sizing, done below with the numbers of the example.

Capital
$
Risk per trade
%
Entry price
$
Stop price
$

Starting numbers: entry at the close of March 1, 2024.

Maximum accepted loss$200.002% of $10,000.00
Risk per share$6.005.5% of the price
Number of shares33rounded down
Position value$3,621.0936.2% of the capital
$10,000.00 × 2% = $200.00 of maximum accepted loss. $109.73 − $103.73 = $6.00 of risk per share. $200.00 / $6.00 = 33.3: rounded down, 33 shares. 33 × $109.73 = $3,621.09 of position value, 36.2% of the capital. If the stop triggers at its level the loss is 33 × $6.00 = $198.00; on a gap it can be larger.

The trailing stop, in two lines

Fig. 7 · The stop that follows the price

entrynew swing lowthe stop rises below the new lowit never moves downexit
  • The trailing stop rises when a new, higher swing low forms: it moves just below that low.
  • It never moves down: if the price pulls back, it stays where it is.
  • When the price touches it, the position closes at the level of the last step, gaps permitting.
  • It can also be built with the ATR (the chandelier exit), with the Parabolic SAR or with a percentage off the high.

Where to go from here

Risk management

The other lessons in the guide

What is technical analysis

  • the study of price and volume to recognise the trend and the levels
  • three premises: price discounts everything, trends, history repeats
  • exercise: uptrend, downtrend or sideways on three real charts

Candlestick chart

  • the four prices of a session: body and shadows
  • green and red, long and short bodies, long shadows, the doji
  • find the candle on a real chart: the judge says yes or no with the numbers

Uptrend: higher highs and higher lows

  • higher highs and higher lows: how to recognize an uptrend
  • swing points, and the two signals that end a trend
  • mark the higher lows yourself on a real chart

Support and resistance

  • the level where the decline stopped, and the one where the rise stopped
  • touches, time and volume: how much a level counts; once broken, it switches roles
  • find the level yourself on a real chart: the judge counts the touches
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Frequently asked questions

What is a stop loss?

An order that closes the position when the price reaches a level decided before entering. For a buyer it is a sell order below the entry price; for a short seller, a buy order above it. Once the level is touched, it fills at the first available price.

Where do you place a stop loss?

Technical analysis places it where the idea behind the trade stops holding: just below the last swing low, below a support level or a trendline; or at a volatility distance, for example two ATRs below the entry. In the Disney example of March 1, 2024, entry at $109.73: the stop below the swing low sits at $103.73, the two-ATR stop at $105.45.

Does a stop loss guarantee the maximum loss?

No. If the stock opens below the stop (a gap), the order fills at the open, lower: the difference is the slippage. It happened in the example: on May 7, 2024 Disney opened at $105.12 against a stop at $105.45. A stop limits the loss, it does not fix it to the cent.

How do you calculate how many shares to buy with a stop loss?

Divide the maximum accepted loss by the risk per share (entry minus stop) and round down. With $10,000 of capital and 2% risk, the maximum loss is $200; an entry at $109.73 and a stop at $103.73 make $6.00 per share: 33 shares.

What is the difference between a stop loss and a trailing stop?

A stop loss stays at the level decided at entry. A trailing stop follows the price: it rises when a new, higher swing low forms and never moves down. Both close the position when the price touches them.

Method and sources

The sources of this page: the books are cited, the text is ours
Source
John J. Murphy, Technical Analysis of the Financial Markets: chapter 16, money management and trading tactics (protective stops, how much to risk per trade).
J. Welles Wilder Jr., New Concepts in Technical Trading Systems (1978): the true range and the average true range.
Robert D. Edwards, John Magee, W.H.C. Bassetti, Technical Analysis of Stock Trends: stop orders, protective and progressive.
Charles D. Kirkpatrick, Julie R. Dahlquist, Technical Analysis: The Complete Resource for Financial Market Technicians: protective stops, trailing stops and volatility stops.
Alexander Elder, Trading for a Living: the 2 percent rule.

The chart uses the Disney sessions from our archive, adjusted for dividends and corporate actions and rounded to 2 decimals; the ATR is Wilder’s 14-session ATR, computed from ; a swing low is the lowest low of the five sessions before and the five after. The example is verified at every update. The numbered figures are diagrams drawn to explain, not prices. This guide explains how the tools work: it does not contain investment recommendations and promises no returns. Our method · licence · report an error.