A stop loss order is the single most important tool you'll use as a trader. It's your safety net. It's the difference between a small loss and a catastrophic loss. Yet many traders either don't use them, use them incorrectly, or move them around like they're made of rubber. This article teaches you everything about stop losses: what they are, where to place them, different types, and how to use them consistently.
What Is a Stop Loss and Why Every Trader Needs One
A stop loss order is an instruction to your broker: "If the price hits this level, sell my position automatically." It's a predetermined exit before you even enter the trade.
Why do you need one? Because emotions will destroy your trading account if you don't have structure. Without a stop loss, here's what happens:
You buy a stock at 500p. It drops to 480p. "It'll bounce back," you think. It keeps dropping to 450p. Now you're thinking "I can't sell here, I'll lock in the loss." At 400p, you're praying for any bounce. By 350p, you're hoping the company doesn't go bankrupt. This isn't hypothetical—this is how accounts get wiped out.
With a stop loss, none of this happens. You enter at 500p, you set your stop at 480p, and if it hits 480p, you're out. Done. No decisions. No emotions. Just a small, defined loss that you calculated in advance.
This is why professional traders have a saying: "You can't manage risk without stops." Stop losses aren't optional. They're mandatory.
Types of Stop Loss Orders
Fixed Stop Loss (Fixed Points)
This is the most basic stop. You set it a fixed number of points away from your entry. For example, you buy FTSE 100 stock at 1000p, you set a stop at 980p (20 points fixed). If price hits 980p, you're stopped out.
Pros: Simple, clear, easy to calculate. Cons: Doesn't adjust for volatility. A 20-point stop on a volatile day means nothing compared to a calm day.
Percentage-Based Stop Loss
You set your stop a certain percentage away from entry. Buy HSBC at 820p with a 3% stop. Your stop is at 820p - (820p × 0.03) = 820p - 24.6p = 795.4p.
Pros: Adjusts slightly for the price level of the stock. Cons: Still doesn't adjust for volatility. A 3% stop on a penny stock might be tiny; on a blue-chip it might be huge.
Support/Resistance-Based Stop Loss
You place your stop just below the most recent significant support level. If you're buying above a trend line, you place the stop just below that trend line. If you're buying above a level that recently acted as resistance, you place the stop just below it.
This is what most experienced traders use because it's logical. If price breaks below support, the setup is broken. Why stay in? Pros: Makes logical sense based on technical levels. Cons: Can result in wide stops on volatile stocks.
ATR-Based Stop Loss
ATR stands for Average True Range—a volatility indicator. You place your stop a multiple of the ATR away from your entry. For example, if ATR is 20 points, you might set your stop at entry minus 1.5 × ATR, or entry minus 30 points.
This automatically adjusts for volatility. On high-volatility days, your stop is wider. On calm days, your stop is tighter.
Pros: Automatically adjusts for current volatility. Reduces fake-outs and stop hunts. Cons: Requires understanding ATR calculation. More complex to calculate manually (though most platforms calculate it automatically).
Time-Based Stop Loss
This is less common but useful for specific strategies. You set a rule: "If I'm not profitable within 5 bars (or 5 days, or whatever timeframe), I exit regardless of price." This is sometimes called a "time stop." It's useful when you're trading mean reversion and you need the bounce to happen quickly.
Pros: Forces discipline, prevents being stuck in stagnant positions. Cons: You might exit right before the move happens.
Trailing Stop Loss
This is a stop that moves with price, always staying a fixed amount (or percentage, or ATR multiple) away. You buy a stock at 500p and set a trailing stop at 480p (20 points). As the stock rises, your stop rises too, always 20 points below the highest price reached. If the stock peaks at 550p, your trailing stop is now at 530p. If it drops back to 530p, you're stopped out with a profit.
Pros: Lets you lock in profits while protecting against reversals. Cons: Can whip you out of trades in choppy markets. Be careful using trailing stops on very volatile stocks.
Where to Place Stops: The Practical Approach
Knowing the types is one thing. Knowing where to actually place them is another. Here are the methods that work best for UK stock traders:
Method 1: Below the Recent Swing Low
This is the most intuitive approach. You're buying above a support level. Your stop goes just below that support. If you're buying a breakout from a consolidation pattern, you place the stop just below the consolidation range.
Example with SHELL (SHEL) on the FTSE 100: The stock has been trading between 2280p and 2320p. You decide to buy on a breakout above 2320p. You set your stop at 2270p—just below the consolidation. This says: "If we're wrong about the breakout and it drops back into the range, I'm out."
Method 2: Support Level × 1.5 ATR
Don't just place your stop exactly at support. Place it slightly below, using ATR to determine how much below. This prevents you from being stopped out on a fake bounce.
Example: You identify support at 2270p. ATR is currently 15 points. You place your stop at 2270p - (1.5 × 15) = 2270p - 22.5p = 2247.5p.
This gives you room for normal volatility while still protecting against a real break below support.
Method 3: Swing Low + Buffer
If you're buying at a support level and there's a recent swing low (the lowest point in the last few bars), place your stop about 1% below that swing low.
Example with Unilever (ULVR): Recent swing low is 4180p. You calculate 1% below: 4180p × 0.99 = 4138p. You place your stop at 4138p.
Method 4: Fixed ATR Multiple
For traders who like consistency: always use 1x, 1.5x, or 2x the current ATR as your stop distance. Don't overthink support levels. Just use the volatility indicator.
This is especially useful for trading volatile stocks where support levels are fuzzy anyway.
Stop Loss Placement Examples With UK Stocks
Example 1: HSBC (HSBA) Long Trade
You identify HSBC forming a double bottom at 795p-800p. Price bounces above the 810p resistance. You want to buy this breakout at 815p. Where do you put your stop?
The double bottom low was at 795p. You add a small buffer (1%) below: 795p × 0.99 = 787.05p. You set your stop at 787p. Your risk is 815p - 787p = 28p per share. If your account is £50,000 and you risk 1%, you risk £500. So you buy 500,000p ÷ 28p ≈ 1,250 shares. (We'd need exact share prices, but this shows the logic.)
Example 2: FTSE 100 Index Futures Trade
You're trading FTSE 100 index futures (each point = £10). The index is bouncing off 8,000. You buy at 8,050. Recent low is 7,980. ATR is 35 points.
Stop placement option 1: Just below support, 1.5× ATR: 7,980 - (1.5 × 35) = 7,980 - 52.5 = 7,927.5. Risk = 8,050 - 7,927.5 = 122.5 points = £1,225.
Option 2: Fixed 2× ATR: 8,050 - (2 × 35) = 8,050 - 70 = 7,980. Risk = 70 points = £700.
You'd likely choose option 2 (2× ATR) because it respects the actual support level and gives you reasonable risk.
Example 3: Smaller Cap Stock With High Volatility
You're trading a FTSE 250 stock at 345p. It's volatile. ATR is 8.5p. You identify support at 330p. You want to buy a consolidation breakout at 352p.
If you place your stop exactly at 330p, you're risking 22p per share—quite wide for such a small stock. Better approach: support (330p) minus 2× ATR (17p) = 313p. Risk = 352p - 313p = 39p. This is wider, but appropriate for a volatile stock.
The Problem With Tight Stops vs Wide Stops
There's a constant tension in stop loss placement: tight stops vs wide stops. Let's break it down.
Tight Stops (Close to Entry)
Example: You buy at 500p and put your stop at 495p (1% risk).
Pros: Small loss if you're wrong. Fits into small position sizes. Pros: You get stopped out on normal market noise. That 495p stop gets hit on a random Tuesday dip, and you miss the rally to 550p that happens Wednesday. This is frustrating.
Wide Stops (Far From Entry)
Example: You buy at 500p and put your stop at 470p (6% risk).
Pros: You don't get stopped out on noise. You give the trade room to breathe. Cons: Much larger loss when you are wrong. Larger position size required to stay within your 1% risk rule, which ties up more capital.
The Balance
The ideal is this: your stop should be where the setup is invalidated, not where you "feel like" taking a loss.
If you're buying a breakout above a resistance level, your stop should be below that resistance. Not 0.5p below (that's market noise), but meaningfully below to account for volatility. Use the 1.5× ATR rule: place your stop 1.5 times the current ATR below the key support level.
This isn't tight and it isn't wide. It's appropriate.
Mental Stops vs Hard Stops
A hard stop is an actual stop loss order placed with your broker. Once you buy, the broker has an instruction to sell if price hits the level. You can't move it (well, you can, but the order is there).
A mental stop is a level you've decided on, but you haven't actually placed an order. You're watching price, and when it hits your mental stop level, you manually exit.
Here's the uncomfortable truth: mental stops are for professionals with real discipline. For everyone else, they don't work.
Why? Because when price hits your mental stop, all your emotions fire up. Your brain says "but maybe it'll bounce back in the next few minutes." You move your mental stop mentally, giving it "just one more chance." You never actually exit. Your 2% stop becomes a 5% loss becomes a 10% loss.
Professionals can use mental stops because they have years of discipline. New traders cannot. Place a hard stop order with your broker every single time. Make it automatic. Remove the choice.
There's one exception: scalp trading (holding positions for minutes to seconds). Here you might use mental stops because you're actively watching price. But for swing or position trades held for days or weeks, always use a hard stop.
Common Stop Loss Mistakes
Mistake 1: No Stop At All
You think "this is such a good setup, I don't need a stop." This is how account blow-ups happen. Every single trade needs a predetermined stop loss. No exceptions. Even your best trades.
Mistake 2: Stop Too Tight
You buy at 500p and place a stop at 497p. You're stopped out on the first 0.5% dip. The stock goes to 550p that afternoon. You're frustrated and you chase the trade. Then you immediately take a loss. This is worse than just taking the original wider stop loss. Use the ATR method to set appropriate stops for current volatility.
Mistake 3: Stop Too Wide
You buy at 500p with a stop at 420p (16% risk). You're trying to give the trade plenty of room. But if you're wrong, the loss is enormous. Also, you probably can't risk 16% on a single trade and stay within risk management rules. Wide stops force oversized positions.
Mistake 4: Moving Your Stop Loss Further Away
You're in a trade, it's dropping toward your stop, so you move the stop further away. "Just giving it more room." This is where discipline breaks down. You've now increased your risk on the trade. You're no longer following your plan. This is how 2% stops become 8% losses.
Rule: You can move a stop closer to protect profit. You never move it further away. Ever.
Mistake 5: Placing Your Stop Above Resistance (On Shorts)
You're shorting a stock at 500p and you place a stop at 510p. But there's strong resistance at 505p. If price breaks 505p, the trade is wrong. You should've stopped out at or just above 505p, not at 510p. Use the same logic as longs: place your stop where the setup is invalidated, not where you arbitrarily decide.
Mistake 6: Not Using Hard Stops
You have a mental stop but you're not disciplined about it. You see the level approach and you think "maybe I'll wait another bar." Then another. Then you're too late and stopped out with an even bigger loss. Just place the hard stop and forget about it.
Guaranteed Stops and Their Costs
Some brokers offer "guaranteed stops"—also called "protected stops." These are stop loss orders that guarantee execution at your specified level, even if price gaps past it.
Example: You own a stock at 500p with a standard stop at 480p. Overnight, bad news comes out and the stock gaps down to 460p at the open. Your 480p stop didn't execute—price never traded through 480p. It jumped over it. With a standard stop, you're now holding at 460p. With a guaranteed stop, the broker executes you at 480p anyway, honouring your protection.
This sounds great. It is great. But it costs money. Guaranteed stops typically cost an extra spread (wider bid-ask) of about 0.5-2% depending on the stock and broker.
For day traders and scalpers, guaranteed stops usually aren't worth it. Your trades are too short-term and gap risk is low. For swing traders and position traders (especially if you hold overnight on volatile stocks), guaranteed stops might be worth considering.
For UK traders: check with your broker. Interactive Brokers, IG, CMC Markets, and others offer some form of protected or guaranteed stops. The costs vary. Calculate whether the gap risk justifies the extra cost for your trading style.
Summary
Stop losses aren't optional. They're the foundation of risk management. Place them using logical technical levels (support, resistance, swing lows) adjusted for volatility using ATR. Always use hard stops—mental stops don't work for most traders. Never move your stop further away from your entry. Remember: you can't manage risk without stops. Build them into every trade, before you enter.