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What is a stop-loss?
A stop-loss is a price at which you sell, decided before you buy. It's the answer to the only question that separates disciplined investors from hopeful ones: at what point would I admit this isn't working?
Why it exists
Because the math of losses is brutal and asymmetric. A 10% loss needs 11% to recover. A 30% loss needs 43%. A 50% loss needs a double. Small losses are recoverable events; large losses are portfolio-changing ones. The stop-loss exists to keep every loss in the first category.
Where to place it — the chart, not a feeling
The principle: a stop belongs just below the nearest meaningful structure — a recent swing low, the 50-day average, or an established support level. Below structure, because a level failing is information; a random 5% wiggle is noise. Stops placed at "whatever loss feels tolerable" get hit by noise constantly.
The classic mistakes
- Moving it down. The stop's entire value is that it's honoured. Lowering it as price falls converts a small planned loss into an unplanned large one.
- Setting it too tight. A stop inside the stock's normal daily range guarantees being stopped out by noise. Volatile stocks need wider stops — or smaller positions.
- Having none in stocks with no floor. Parabolic movers often have no support for 20-30% below. There, an honest system admits the stop is a guess — which usually means the position should be small or skipped.
The real function
A stop-loss isn't a prediction that the stock will fall. It's a pre-commitment that removes the worst decision-maker in markets — you, at the moment of loss — from the process.
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Educational only — not financial advice. This guide explains general concepts for learning purposes and is not a recommendation to buy or sell any security. Always do your own research and consult a licensed financial adviser before investing.
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