Trading glossary
Stop-loss order
By the PatternX team · Published
Definition
A stop-loss order closes a position automatically once price moves a set distance against you, to limit the loss on a trade. It fixes the price at which the exit is triggered, not the price at which it fills.
How it works
A stop has a trigger price. When the market trades at or through it:
- A stop-market order becomes a market order. It should fill, but at whatever price is available.
- A stop-limit order becomes a limit order. It won't fill worse than its limit, but it may not fill at all if price jumps past it.
Common ways to place it:
- Structure: just beyond the level that would prove the idea wrong, such as a swing low or a pattern's neckline.
- Volatility: a multiple of average true range, so ordinary noise doesn't trigger it.
- Fixed percentage: simple, but blind to the chart.
Why it matters
The stop sets what a trade risks, and position size should follow from it:
Position size = amount you're willing to lose ÷ distance from entry to stop
Together with a take-profit, the stop also defines the trade's risk-reward ratio.
Example
For example, with a hypothetical $20,000 account and 1% risk ($200), you buy at $50.00 with a stop at $48.00, so you buy $200 ÷ $2.00 = 100 shares. The stock then opens at $46.00 after bad news. A stop-market order fills near $46.00, a loss of about $400, double the plan. A stop-limit order with a $47.80 limit doesn't fill unless price climbs back to $47.80, so you may still hold the shares.
Common mistakes
- Moving the stop further away once the trade goes against you.
- Placing it so close that normal fluctuation triggers it.
- Assuming a stop is resting at the broker when it only exists in an app or in your head.
How PatternX uses it
On PatternX's chart-pattern signals, the stop is the tighter of your stop-loss setting (platform default 5%) and the pattern's own stop level, which includes a 0.2% buffer. Position size follows from it: by default, 1% of balance at risk divided by the stop distance. For live trades, a stop is placed at the venue right after the fill, using that venue's own mechanism. If the venue refuses it, PatternX closes the position immediately at market and alerts you. In Momentum Lab the default hard stop is 3% from the average fill; like any stop, it controls where the exit starts, not where it fills. See risk controls.