What Is a Stop-Loss?
A stop-loss order is an instruction to sell (or buy, for short positions) automatically if the price reaches a specified level. It converts unlimited downside risk into a defined, manageable loss.
In PaperTrade Academy, when you place a stop-loss on a simulated position, the platform will automatically generate a sell order if the price crosses your stop — just like a real brokerage.
Why Most Traders Struggle With Stops
Knowing that you need a stop is easy. Knowing where to put it is harder. Common mistakes:
- Too tight — placed inside normal price noise, triggering before any real move
- Too wide — placed so far away that the loss becomes unacceptably large
- No stop at all — "I'll watch it closely" — this fails when life, news, or volatility strikes fast
- Moving the stop lower — this is loss aversion at work; it defeats the purpose entirely
Placement Principles
Below Support
Place stops below a significant support level (recent swing low, round number, moving average). If price breaks decisively below support, the thesis is invalidated.
Support at $75 → Stop at $73.50 (gives a small buffer below support)
Volatility-Adjusted (ATR Method)
Use the Average True Range (ATR) — a measure of recent daily price swings — to calibrate stop distance:
Stop = Entry − (1.5 × ATR)
If ATR is $3, your stop is $4.50 below entry. This ensures the stop is beyond typical noise.
Percentage-Based
Simple but less sophisticated: set the stop at a fixed percentage below entry (e.g., 5–8%). Avoid using the same percentage for both volatile and stable stocks — volatility differs.
Trailing Stops
A trailing stop automatically moves up as the price rises, locking in profits:
- Fixed dollar: if stock rises $5, the stop rises $5
- Percentage: stop stays X% below the current high
Trailing stops are powerful for riding trends without manually updating your exit level daily.
The Stop-Loss Trade-Off
| Tight stop | Wide stop |
|---|---|
| Small loss if wrong | Larger loss if wrong |
| Smaller position size needed | Larger position size needed |
| Hit more often by noise | Less likely to be hit by noise |
There is no universally "correct" width. The right stop balances your risk tolerance with the stock's volatility and your thesis.