Smart position sizing & risk management

Back to glossary
Order Types

Stop Loss

An order to sell a position when it reaches a specified price, limiting potential losses.

What is a Stop Loss?

A stop loss is an order placed to sell a security when it reaches a certain price, designed to limit an investor's loss on a position. Once the stop price is hit, the order becomes a market order.

Types of stops

  • Hard stop: a fixed price level (e.g., sell if price drops to $48)
  • Trailing stop: moves with the price, locking in profits (e.g., always $2 below the high)
  • Mental stop: a price level you plan to exit at without placing an actual order (risky: emotions can override)

Where to place stops

Place stops at levels where your trade thesis is invalidated: below support, below a moving average, or at a multiple of ATR. Never place stops at round numbers where everyone else's stops are.

RiskPicks calculates your exact position size based on where you set your stop loss, so you always know your maximum risk before entering a trade.
Try it in the Calculator

Related Terms

ATR

Average True Range: measures volatility by averaging the true range over a set period (typically 14 days).

Bag Holder

A trader or investor stuck holding shares of a stock that has dropped significantly below their purchase price, often hoping for a recovery that may never come.

Limit Order

An order to buy or sell at a specific price or better. Only executes at the limit price or more favorable.

Position Sizing

Determining how many shares to buy based on your account size, risk tolerance, and stop loss distance.

Risk/Reward Ratio

The ratio of potential loss to potential gain on a trade. A 1:3 ratio means risking $1 to potentially make $3.

Trailing Stop

A stop that automatically adjusts upward as price rises, locking in profits while allowing the trade to run.