12.2What is a stop loss (as a risk tool)?
1What is it?
A pre-decided price at which you exit a losing position: your "I was wrong" level.
2Why does it exist?
It turns an unknown, possibly huge loss into a known, small one.
3Risks
- Gaps can skip your stop.
- Moving stops further away "to give it room" defeats the purpose.
4Practical use
Place stops at a logical level (below support or a recent low), not at a random %. Then size the position so that hitting the stop costs only what you planned.
5Quick revision
- Pre-decided exit.
- At a logical chart level.
- Never widen it after entry.
6Knowledge check
Q1. Where to place a logical stop for a long trade?Show answer
Below support or a recent swing low.
Q2. What is the danger of moving your stop lower?Show answer
Small losses become big ones.
Q3. Can gaps skip stops?Show answer
Yes.