An automatic exit at your chosen price

Where does a stop loss usually make most sense?

Where your trade idea is proven wrong

Your safety exit: stop loss

Every trade can go wrong. A stop loss is your planned exit: it closes the trade automatically if price reaches a level you chose in advance.
Buy a share at US$100 with a stop at US$95. If you're wrong, you lose US$5 a share, which is 5%. You know your normal worst case before you start.
Place the stop where your idea is proven wrong, for example just below support. Not at a random number, and not so close that normal wiggles hit it.
A stop becomes a market order when it's hit. If a share closes at US$50 and opens at US$44 after bad news, a stop at US$48 fills near US$44: a 12% loss, not 4%.
Common mistake
Myth: moving your stop further away “to give it room” is smart. Reality: it turns a small, planned loss into a big, unplanned one. Set it, then respect it.
Key takeaway
Decide your exit before you enter. A stop loss keeps small losses small, though gaps can make them bigger.

A stop loss is... An automatic exit at your chosen priceIt closes the trade for you at a level you set in advance, so one bad trade can't run out of control.
Buy at US$200, stop at US$190. The planned loss is... 5%The gap is US$10, and US$10 is 5% of US$200.
In a big gap, a stop loss can fill... Worse than your levelWhen price jumps past your stop, the order fills at the next available price, which can be much worse.
Where does a stop loss usually make most sense? Where your trade idea is proven wrongIf price reaches the level that breaks your idea, there's no reason to stay in the trade.