June 1, 2026·7 min read·By WideRadar

Stop-Loss Orders Explained: Types and How to Set Them

A stop-loss order is the single most important risk-management tool most traders never use correctly. Here's how each type works and how to place a stop that actually protects you.

A stop-loss order is a standing instruction to sell (or buy, if short) a position automatically once price reaches a specified level, capping a loss before it grows larger. It sits alongside market and limit orders as one of the core order types every trader must understand — and it's the single most reliable tool for enforcing risk discipline, because it removes the need to make a rational decision in the moment a trade is going against you.

Stop-market orders

A stop-market order becomes a market order the instant the stop price is touched, guaranteeing the position closes but not guaranteeing the exact fill price. In a fast-moving or illiquid stock, the actual execution can happen well beyond the stop price — a phenomenon called slippage — but the position is reliably closed, which is usually the priority in a genuine risk-management stop.

Stop-limit orders

A stop-limit order becomes a limit order once the stop price is touched, guaranteeing the fill price (or better) but not guaranteeing the order fills at all. In a sharp gap or fast sell-off, price can blow through the limit price entirely, leaving the position open with no protection exactly when it was needed most — a real risk to understand before choosing this order type for a genuine stop-loss.

Trailing stops

A trailing stop moves automatically as price moves favorably, staying a fixed dollar amount or percentage behind the highest (or lowest, for shorts) price reached, but never moving back against the position. It's a mechanical way to lock in profit as a trend extends while still giving the trade room to breathe on normal pullbacks.

Where to actually place the stop

The most common beginner mistake is placing a stop at an arbitrary percentage ("I'll risk 5%") without regard to the stock's actual behavior. A better approach anchors the stop to market structure — just below a recent swing low or established support level — or to volatility, using a multiple of Average True Range (ATR) so the stop reflects how much the stock normally moves rather than a round number that has nothing to do with its behavior.