A stop loss is a predefined rule for exiting when price action or the underlying thesis reaches an invalidation point. It can be implemented with an order or manually, but the core idea is to decide in advance what evidence means the trade is wrong.
How it works
A price stop triggers at a specified level, while a thesis stop can be tied to earnings, policy, or other evidence. The stop should ideally reflect what would invalidate the original reason for the trade rather than an arbitrary percentage used for every asset.
A trigger price is not an execution guarantee. If the market gaps through the stop or available bids disappear, a stop-market order trades at the next available prices, which can be significantly worse than planned.
Why it matters
Stops make open-ended downside more measurable, which is necessary for position sizing and risk-reward planning.
But they are not insurance against all outcomes. Event risk, leverage, and poor liquidity can create losses larger than the planned amount even when the stop rule itself was followed correctly.
A simple market example
WTI on March 9, 2026 also shows why stop prices are not guaranteed fill prices. CME reported that the front-month contract gapped higher, traded near $119, then collapsed toward $81 before settling below $91. In a market crossing that many price levels, a stop at $100 does not force the exchange to fill at $100. If bids at that level disappear before the order reaches them, the actual exit can occur materially lower. The rule can be correct while the realized loss is larger than the planned loss.
Common mistakes
Assuming a stop guarantees the maximum possible loss. Gaps, illiquidity, and fast markets can produce worse fills.
Moving the stop farther away simply because price is close to triggering it. That turns a predefined risk into an open-ended one.
Frequently asked questions
Does a stop order always execute?
No. Execution depends on available liquidity after the trigger. A stop-market order seeks the next available price, not a guaranteed price.
Should every trade use a fixed 5% stop?
No. A stop should relate to the asset's behavior and the evidence that would invalidate the thesis.
Do long-term investors need stops?
They may not use short-term price stops, but they still need rules for thesis failure, valuation changes, concentration limits, or portfolio rebalancing.
Educational content only. Definitions describe common market usage and may vary by jurisdiction, instrument, or institution.