Stop Loss
A stop loss is a predetermined price level where you automatically exit a losing trade to limit your loss. It's your escape hatch when you're wrong.
Understanding the Concept
You will be wrong. A lot. The question is whether you'll be wrong for a 2% loss or a 50% loss. Stop losses keep small losses small. They remove emotion from the equation—no more holding bags hoping for a miracle. Set your stop when you enter the trade, not after it's already down 30%. Place stops below support levels in longs (above resistance in shorts) so normal volatility doesn't trigger them. The most common mistake? Moving your stop further away when price approaches it. That's how you turn a $500 loss into a $5,000 loss. If your stop hits, the trade idea was wrong. Accept it and move on.
Real-World Example
You buy Ethereum at $3,000 with support at $2,850. Your stop goes at $2,820 (just below support). If ETH drops to $2,820, you're out with a small loss. No hoping, no praying.
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