Dive deeper: Day trading in Canada
What is a stop-loss order?
Learn how to use a stop-loss order, an important weapon in the arsenal of any stock trader.
Stock prices never sit still during trading hours. If you’ve done the hard yards of research and analysis before placing your trades, the market will hopefully move the way you want—no matter whether that’s up or down. But when the market moves against you quickly, it makes sense to have a safety net in place to limit your losses. This is where a stop-loss order comes into play.
What is a stop-loss order?
A stop-loss order lets you automatically buy or sell a stock when its price reaches a specific value. When the value of the stock reaches your preset stop price, this triggers your trade. The stop-loss order then converts to a market order, allowing you to buy or sell the stock at the next available price.
Also known as a stop order, a stop-loss order is an important risk management tool. It is used to limit your losses when the market moves against you, or to lock in a specific amount of profit.
This guide focuses on the use of stop-loss orders in stock trading. However, you can also put stop orders to work when trading other assets, such as forex and cryptocurrency.
Let’s look at how stop-loss orders work with a couple of examples.
Example 1: Using a stop-loss order to minimize losses
Let’s say you buy 1 stock for $200. You expect it to rise in value, but you want a safety net in place in case the stock experiences a rapid price drop for some reason.
By setting a stop-loss order at $190, you can cut your losses in a falling market. When the price of that stock hits $190, your stop-loss order converts to a market order to sell your stock.
Example 2: Using a stop-loss order to lock in profits
Let’s say you bought 1 stock for $150 in 2024. By November 2025, your stock has risen in value by 40% and is now worth $210.
You then think that stock still has room to increase further in price, so you don’t want to sell your share just yet. But you also want to lock in some of the profit you’ve already made in case that stock’s price starts to fall and wipe out the gains you haven’t yet realized. By setting a stop loss order at $200, you will trigger a sale of the stock if its price reaches $200, locking in a big chunk of your profits.
Types of stop-loss orders
There are three main types of stop-loss orders you need to be aware of.
Standard stop-loss order
This is the simplest form of a stop-loss order. It allows you to set a stop price, and when the stock in question reaches that price, the stock will be automatically sold at the best available price.
You can also place buy-stop orders, allowing you to automatically buy a stock when it reaches a predetermined price level.
Stop-limit order
A stop-limit order offers a key advantage over a standard stop-loss order. It allows you to set two prices:
- The stop price
- The limit price, which is the minimum price at which you are willing to sell the stock
While a standard stop-loss order converts to a market order when triggered, a stop-limit order converts to a limit order. This ensures that in a rapidly declining market, you don’t sell your stock for a lower price than you’re happy with.
For example, if you have a stock valued at $210, you could set the stop price at $195 and the limit price at $192. So if that stock’s price falls below $195, you will only sell your stocks if they can be sold at $192 or better.
Trailing stop-loss order
A trailing stop is a useful order type for protecting profits. When the price of a stock increases, the stop price is automatically adjusted to follow behind at a fixed distance.
You can set a trailing stop a certain percentage below the stock price or a specific dollar amount below.
For example, let’s say you buy a stock at $100 and set a trailing stop at 5%. Initially, the order would be triggered if the price falls to $95. But if the stock increases to $110 the stop price increases to $104.50, and if the stock rises to $120 the stop price increases to $114—and so on.
What’s the difference between a stop-loss and limit order?
A stop-loss order triggers a market order when a preset price of a stock is reached. A market order then buys or sells the stock straight away at the best available price.
Meanwhile, a limit order allows you to specify the price at which you want to buy or sell a stock. Your order is then automatically executed when the price you want (or a better one) becomes available.
How to place a stop-loss order
The exact steps for placing a stop-loss order vary between trading platforms. But as a general guide, here’s what you need to do.
Step 1: Open a brokerage account
Choose a brokerage platform that allows you to place stop-loss orders, sign up for an account and fund your account before you can start trading. We compiled a list of platforms that support stop-loss orders below:
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Step 2: Log into your trading account
Enter your credentials to log into your account. Navigate to the dashboard page that shows a list of your stock holdings.
Step 3: Select a stock
Choose the stock you want to set up a stop-loss order for and click or tap on “Sell”.
Step 4: Choose a stop-loss order
You’ll now need to select the type of order you want to place. While market and limit orders are the most common order types, you will now need to select a stop-loss order.
Step 5: Set your trigger price
Enter the price at which your trade will be triggered. If placing a stop-limit order, you’ll also need to set the limit price.
Step 6: Set the order expiry date
By default, stop-loss orders will typically expire at the end of the trading day. However, you also have the option to choose a specific date when the order will expire.
Step 7: Place your order
Review that all the details of your order are correct before confirming and placing the order.
Benefits of stop-loss orders
There are several reasons why stop-loss orders are a useful resource when trading stocks:
- They limit losses and lock in profits. As shown in the examples above, you can use stop-loss orders to cut your losses in a declining market or protect your gains against future downturns.
- They’re automatically executed. Many of us don’t have the time or patience to constantly monitor our trading positions and act on market moves as they happen. A stop-loss order takes matters out of your hands, ensuring that you can respond to a rapidly changing market situation.
- They keep emotion out of your trading decision. The automation of these orders also lets you remove your own emotional biases from your trades. For example, they can prevent you from holding on to a declining stock for too long for sentimental reasons.
- They help you manage your risk. Trading stocks is risky, and stop-loss orders provide crucial protection for your money.
- They’re usually free. It usually won’t cost you any extra fees or commissions to place a stop-loss order.
Drawbacks and risks of stop-loss orders
While they sound great in theory and do offer several benefits, stop-loss orders also have a few downsides:
- The price isn’t guaranteed. Your stop-loss order could be triggered at a certain price, but you may not actually get that price — instead, your order will be fulfilled as a market order at the next available price. In fast-moving and volatile markets, the next available price means that you may end up losing more than you originally thought you would.
- You could trade at the wrong time. During times of market volatility, there is the potential for a price drop to trigger your stop-loss order, only for the price of the stock to then rebound above its previous price. Some traders recommend that instead of setting stop-loss orders, you should set up price alerts. This way you can decide for yourself what to do next and work out whether the stock represents a good investment.
- Not completely “set and forget”. Stock prices change, so if your broker doesn’t support trailing stops, you may need to keep adjusting your stop-loss level in line with market movements.
- Best suited to short-term traders. If you’re a long-term investor who plans to buy and hold a stock and ride out any short-term volatility, you may never have any need to place a stop-loss order.
- Some stocks are more volatile than others. Some stocks experience greater price fluctuations than others, so you may need to set different stop-loss margins for each investment you own.
- May only be available on advanced trading platforms. If your broker offers separate trading platforms for beginners and experienced traders, you may need to use the advanced trading platform to access order types like stop-losses.
What is the 7% stop-loss rule?
The 7% stop-loss rule in trading is all about knowing when to cut your losses. According to the rule, you should sell a stock once it drops 7% below the price you paid for it. No matter the stock or any mitigating factors that may explain its drop in price—sell, sell, sell.
It’s a strategy that was popularized by famous American investor William J. O’Neil. In his book How to Make Money in Stocks, O’Neil wrote that investors should sell whenever a stock drops 7-8% below its purchase price.
So by setting a stop-loss order 7% below the price you paid for a stock, you can protect yourself from being wiped out by a major market downturn. It’s a way of taking your emotions out of the equation, keeping losses at an acceptable level and living to fight another day.
But like any other investing or trading strategy, it’s up to you to decide whether the 7% stop-loss rule is a good match for your investment goals and risk tolerance.
Bottom line
While they’re not without drawbacks, stop-loss orders are a handy risk management tool to have at your disposal. It’s easy to implement them as part of your trading strategy, so compare brokers today to find a trading platform that supports all the advanced order types you need.
Frequently asked questions about stop-loss orders
Sources
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