What it is
A stop loss is a predetermined exit that ends a losing position at a defined point. Its function is not to be right; it is to make the size of a mistake known in advance, which is the precondition for sizing a position at all.
How it works
Placement methods fall into a few families. Structural stops sit beyond a level that would invalidate the idea, such as under a swing low or outside a range. Volatility stops sit a multiple of ATR away so they scale with conditions. Percentage stops use a fixed fraction of price. Time stops exit when the thesis has failed to develop within an expected window. Trailing stops convert an open profit into a floor as the trade moves. Mechanically, a stop-market order guarantees execution but not price, while a stop-limit order guarantees price but may not fill at all.
How traders use it
The order of operations matters. Place the stop where the idea is wrong, then size the position so that distance equals the intended risk. Doing it the other way round, choosing a size first and then putting the stop where the loss feels tolerable, leaves the exit at an arbitrary price with no relationship to the chart, and it is the most common way traders manufacture a long series of small avoidable losses.
Where it breaks down
Stops carry real costs. Clusters of them just beyond obvious highs and lows are visible to everyone and are routinely swept before price reverses. Gaps and fast markets mean the realised exit can be far worse than the level chosen. And a stop tight enough to eliminate risk is usually tight enough to eliminate the strategy, because the ordinary noise of the instrument sets a floor on how close an exit can sensibly sit.
Educational reference. This entry describes how a concept is defined and used. It is not investment advice, not a recommendation, and not a signal. Any rule you build from it should be tested with realistic costs before it is traded, and no historical result guarantees a future one.