# Stop-loss

> A stop-loss is a predefined exit price at which an open position is closed, converting an open-ended loss into a bounded one. On its own the stop bounds nothing: the loss it caps is only known once the position size is derived from the stop distance, so a trade risking 1% of a $10,000 account with a stop 4% from entry is sized at $2,500 and not more. When triggered, a stop order becomes a market order and fills at whatever price is available, which in a gap can be well past the stop; a stop-limit order may not fill at all.

Canonical HTML page: https://qanterion.com/glossary/stop-loss
Updated: 2026-09-02
Also known as: stop order, protective stop, stop-loss order

## How it is calculated

```
Risk per trade = Equity × Risk fraction            (e.g. 1%)
Position size  = Risk per trade ÷ (Entry − Stop)    with (Entry − Stop) as a fraction of Entry

$10,000 × 1% = $100 risk;  stop 4% from entry  →  $100 ÷ 0.04 = $2,500 position

Expected fill  = Stop price − Slippage              (stop order; a stop-limit may not fill at all)
```

## Worked example

A $10,000 account at 1% risk gives $100 per trade; with entry at $50 and a stop at $48 (4%), the position is $2,500, or 50 shares. If the stop triggers on a gap to $47.50, the fill is $47.50 and the loss is $125, not $100.

## A stop is a sizing input, not a safety net

The distance from entry to stop is the denominator of position size: risk per trade divided by that distance. Tightening the stop from 4% to 2% while keeping the dollar risk at $100 doubles the position from $2,500 to $5,000; it does not halve the risk, it doubles the leverage on the same loss. That is why the stop has to sit where the trade's thesis is wrong — a price level, a volatility multiple, a time limit — and the size is computed afterwards. A stop placed by feel and a position sized by feel are two independent guesses, and the loss they produce together is whatever it turns out to be.

## Whether it adds value depends on the return process

Kaminski and Lo tested simple stop-loss rules on US equities from 1950 to 2004. Under a random walk a stop lowers expected return, because it sells after losses that carry no information about what comes next. When returns show momentum, the same rule added roughly 50 to 100 basis points per month during the periods it was stopped out, because there a loss did predict further loss. The stop is therefore a bet on the same persistence that trend-following strategies rely on, not a substitute for it. QANTERION applies the same logic one level up: every managed strategy runs under a hard maximum-drawdown cap — 3% for crypto, 5% for the others — that acts as a portfolio-level stop.

## How it gets misread

The common error is to place the stop at the loss one can tolerate — "I can afford to lose 5%" — and then size the position by some other rule, so the stop marks an amount of pain rather than the point at which the trade is wrong. The second error follows from the first: when price approaches a stop that was never tied to a thesis, nothing prevents the trader from moving it further away, and the bounded loss becomes open-ended again. A stop that can be moved away is not a stop; it is a suggestion.

## Calculate it

- Position Size Calculator: https://qanterion.com/tools/position-size-calculator
- Risk of Ruin Calculator: https://qanterion.com/tools/risk-of-ruin-calculator
- Liquidation Price Calculator: https://qanterion.com/tools/liquidation-price-calculator

## See also

- Position sizing: https://qanterion.com/glossary/position-sizing
- Maximum drawdown: https://qanterion.com/glossary/max-drawdown
- Slippage: https://qanterion.com/glossary/slippage

## Sources

- [When do stop-loss rules stop losses?](https://dspace.mit.edu/handle/1721.1/114876) — Journal of Financial Markets (Kaminski & Lo), open-access copy at DSpace@MIT
- [Time Series Momentum](https://www.aqr.com/Insights/Research/Journal-Article/Time-Series-Momentum) — Journal of Financial Economics (Moskowitz, Ooi & Pedersen), hosted by AQR
- [A Century of Evidence on Trend-Following Investing](https://www.aqr.com/Insights/Research/Journal-Article/A-Century-of-Evidence-on-Trend-Following-Investing) — The Journal of Portfolio Management (Hurst, Ooi & Pedersen), hosted by AQR

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## Risk notice

Definitions are educational. Nothing here is investment advice, and no metric described on this page predicts future results.