Stop-loss

Stop-loss is a standing exit order placed at a price level below your long entry (or above a short entry) that automatically closes the position if the market moves against you by a defined amount. Its primary purpose is to cap the loss on any single trade to a predetermined dollar amount or percentage of capital.

Beyond loss capping, the stop distance has a second critical role: it defines the risk leg of every position-sizing calculation. If you know you will exit at a loss of $X, you can work backwards to find the number of contracts that makes $X equal to your chosen risk per trade (typically 0.5-2% of account equity).

Formula:

positionSize = riskAmount / (entryPrice - stopPrice)

Example. Account: $10,000. Risk per trade: 1% ($100). Entry: $30,000. Stop: $29,700 (a $300 gap per unit). positionSize = 100 / 300 = 0.33 units.

Placing a stop-loss without sizing from it is only half the job. Pair it with a take-profit to define your reward-to-risk ratio, and use the position size calculator to keep risk consistent across trades.