How Stop-Loss Orders Work
If you buy a stock at $100 and set a stop-loss at $90, your broker automatically submits a sell order when the price hits $90 — capping your loss at 10%.
When triggered, a stop order converts to a market order. In fast-moving markets it may execute slightly below your stop price — this is called slippage.
Trailing Stop-Loss
A trailing stop adjusts upward as the price rises but stays put when the price falls. It locks in profit as the stock climbs.
Example: buy at $100 with a 10% trailing stop. If the stock rises to $130, your stop moves to $117. If it then falls to $117, the sell triggers — locking in a 17% gain.
Setting the Right Stop Level
Technical traders often place stops just below key support levels. A percentage-based approach (e.g. 5–8% below entry) is simpler and works well for most investors.
Too tight a stop gets triggered by normal daily volatility. Too wide and you absorb large losses. The right level depends on the stock's volatility and your personal risk tolerance.