A stop loss is a price level where you will exit a losing trade, limiting your maximum loss. It's a key part of risk management.
You buy a call option for $300. You set a stop loss at $150 (willing to lose $150 max).
If the option falls to $150, you exit and lock in the $150 loss. Without a stop, you might hold all the way to $0 and lose $300.
Never trade without a stop loss. It's your insurance against catastrophic losses.
% Based: Lose 50% of entry cost before exiting (e.g., paid $300, stop at $150)
Fixed Dollar: Lose a fixed amount per trade (e.g., "I'll lose $300 max")
Technical: Stop at a resistance/support level that invalidates your thesis
This is the hard part. When your trade is down, emotion says "hold, it'll come back." But your plan says "exit at stop." You must follow the stop.
Stops reduce stress. You know your max loss before entering, so you can sleep at night.
Related: Stop Order, Risk Management, Position Sizing
