# How to Set a Stop Loss: Fixed, Trailing and ATR Methods Explained

Source: https://cluenex.com/learn/portfolio-management/stop-loss-methods/
Publisher: Cluenex (https://cluenex.com)
Updated: 2026-10-15

## Short answer

A stop loss is an order that sells a position when the price falls to a level you chose in advance, so a loss is capped. Common methods are a fixed percent below entry, a trailing stop that rises with price, and an ATR stop set 1.5 to 3 times the stock's average daily range below entry.

## Key takeaways

- A stop loss is an order placed with your broker that triggers a sale at a preset price, so the exit decision is made before emotions are involved.
- Fixed percent stops are simple but ignore how much a stock normally moves. A 3% stop on a stock that swings 4% a day will trigger on ordinary noise.
- ATR (average true range) stops scale the distance to the stock's own volatility: stop = entry minus ATR times a multiplier, often 1.5 to 3.
- A trailing stop only moves up. A 10% trailing stop on a stock bought at $100 starts at $90 and rises to $108 if the high reaches $120.
- A stop order becomes a market order once triggered, so the fill can be worse than the stop price, especially on overnight gaps.
- Size the position from the stop distance: shares = dollars you accept losing divided by the per-share distance to the stop.

## What is a stop loss?

A stop loss is an order that tells your broker to sell a position if the price falls to a level you set. Its job is to cap how much one position can cost you and to make the exit decision before fear or hope gets involved.

The key idea is that the stop turns an open-ended risk (the stock could keep falling) into a planned one (you exit near a known price). The FINRA investor education page on stop orders describes the order type and its limits. A stop is not insurance: it does not guarantee a price.

## How does a stop order actually work?

A standard stop order sits unseen until the stock trades at or below your stop price. Then it becomes a market order and sells at the next available price, which can be lower than the stop.

The SEC's investor guidance on stop orders warns that in a fast market or after an overnight gap, the fill can be far from the stop price. Example: your stop is $95, the company reports bad news after the close, and the stock opens at $88. The order triggers at the open and fills near $88, not $95.

A stop-limit order adds a minimum price. It avoids a bad fill, but if the price blows through your limit, the order may never execute and you stay in the position.

| Order type | What happens when triggered | Main risk |
|---|---|---|
| Stop (stop-market) | Becomes a market order | Fill can be worse than the stop price |
| Stop-limit | Becomes a limit order | May not fill at all |
| Trailing stop | Stop price follows the high | Can trigger on a normal pullback |

## How do you set a fixed percentage stop loss?

Multiply your entry price by (1 minus the percent you will tolerate). That is the stop price.

Formula: stop = entry x (1 - stop %). Example: you buy at $100 with a 8% stop. Stop = $100 x 0.92 = $92, so the most you lose per share is $8, before any gap.

The weakness is that a fixed percent ignores the stock. A calm stock may rarely move 8% in a month, while a volatile one can move that in a week. The same percent is too loose for one and too tight for the other.

## How do you set an ATR-based stop loss?

Take the stock's average true range (ATR), multiply it by 1.5 to 3, and subtract the result from your entry price. ATR is the average distance a stock moves in a day, usually measured over 14 days, and was introduced by J. Welles Wilder in 1978.

Formula: stop = entry - (ATR x multiplier). Example: you buy at $50 and the 14-day ATR is $1.20. With a multiplier of 2, the stop is $50 - $2.40 = $47.60. Risk per share is $2.40, or 4.8%.

Now compare a 3% fixed stop on the same stock. That stop is $48.50, only $1.50 away, which is barely more than one average day of movement. Normal noise could hit it before the idea has any time to work.

A wider multiplier (3) gives more room and fewer false exits but a larger loss when wrong. A tighter one (1.5) does the opposite. Neither is correct in general. Pick one, then size the position to fit it.

## How does a trailing stop work?

A trailing stop follows the highest price since you bought, staying a set distance below it, and never moves down. It locks in part of a gain without you resetting the order by hand.

Example with a 10% trail, bought at $100:

- Price $100: stop $90.
- Price rises to $120: stop moves to $108.
- Price slips to $115: stop stays at $108.
- Price falls to $108: the stop triggers, and you exit near $108, an 8% gain.

You can trail by percent, by dollars, or by ATR (highest price minus ATR x multiplier). The cost is that a healthy uptrend often pulls back 10% or more, and a tight trail will sell you out of a stock that then continues higher.

## How does a support-based stop work?

A support-based stop sits just below a recent low or a price level where the stock has bounced before. The reasoning is that a drop below that level means the reason you bought no longer holds.

Example: a stock bounced three times near $95. You buy at $106 and place the stop at $94, a little below $95 to avoid a brief dip. Risk is $12 per share. This method needs a clear level on the chart, and if that level is far from your entry, the risk may be too large for your plan.

## How do you size a position from the stop?

Decide how many dollars you accept losing, then divide by the per-share distance to the stop. This is what makes the stop useful, because the stop distance and the share count work together.

Example: a $20,000 account, risking 1% ($200) on one trade. Entry $50, stop $47.60, so risk per share is $2.40. Shares = $200 / $2.40 = 83 shares, a position of about $4,150. If the stop is hit at its price, the loss is about $200. See the guide on [position sizing](/learn/portfolio-management/position-sizing/) for more.

## When do stop losses fail or not apply?

Stops fail when price gaps past them, when they sit where normal noise reaches them, or when they do not match how long you plan to hold.

- **Gaps:** earnings news, overnight events and trading halts can skip your price entirely.
- **Too tight:** a stop inside the stock's normal daily range gets hit by noise, so you take many small losses.
- **Moving the stop lower:** widening a stop after entry raises your risk beyond the plan you made. Move it only in the direction of protecting gains.
- **Crowded round numbers:** many orders cluster at $50 or $100, so a stop a little beyond those levels can avoid brief spikes.
- **Long-term investing:** an investor holding a diversified fund for decades may not want a price stop at all. A thesis-based rule (sell if the reason for owning changes) can fit better. See [when to cut losses vs hold](/learn/portfolio-management/cut-losses-vs-hold/).
- **Taxes:** a stop sale in a taxable account is a taxable event, and the loss may be affected by wash-sale rules if you rebuy within 30 days.

Stops also do not protect a whole portfolio. Spreading money across holdings does more for that. See [how to diversify](/learn/portfolio-management/portfolio-diversification/).

## What this means for you

If you have a regular job and a brokerage account, you cannot watch prices all day, so a written exit rule matters. Use these habits:

1. Decide the exit before you buy. Write down the stop price and the dollar loss it represents.
2. Match the stop to the stock. Look up the 14-day ATR on your chart and place the stop 1.5 to 3 ATRs below entry instead of using one percent for every stock.
3. Size the position from the stop, using the formula above, so one miss costs a set small share of your account.
4. Know your order type. Check whether your broker's stop becomes a market or limit order, and remember gaps can fill below your price.
5. Review stops after earnings dates, when gaps are most likely.
6. If you are a long-term investor, consider a rule based on your reason for owning, plus periodic [rebalancing](/learn/portfolio-management/portfolio-rebalancing/), instead of a tight price stop.

Cluenex stock pages show a stock's business quality and main risk, which can help you set the reason for owning before you decide where an exit belongs. See any stock at https://cluenex.com/stocks/<ticker>/ with the ticker in lowercase.

## Questions people ask

### What percentage should a stop loss be?

There is no single best percent. Many traders use 5% to 10% for swing trades, but an ATR stop, set 1.5 to 3 times the stock's average daily range below entry, fits each stock's own volatility better than one flat number.

### Should I use a stop-limit or a stop-market order?

A stop-market order almost always fills but may fill below your stop price in a gap. A stop-limit order controls the price but may not fill if the stock drops past your limit, leaving you in the position.

### Do stop losses work after hours or overnight?

Most standard stop orders trigger only during regular trading hours, so an overnight gap can open well below your stop and fill at that lower price. Check your broker's rules on extended-hours orders.

### What is the difference between a stop loss and a trailing stop?

A stop loss stays at a fixed price you set. A trailing stop follows the stock's highest price at a set distance and only moves up, so it can lock in gains as the price rises.

### Should long-term investors use stop losses?

Many do not, because normal price swings can sell a good holding at a low. Long-term investors often use a rule based on whether the reason for owning has changed, plus regular rebalancing.

## Sources

- [Investor Bulletin: Stop Orders](https://www.investor.gov/introduction-investing/investing-basics/glossary/stop-order)
- [Stop Orders and Stop-Limit Orders](https://www.finra.org/investors/investing/investment-products/stocks/stop-orders)
- [Wash Sales](https://www.investor.gov/introduction-investing/investing-basics/glossary/wash-sales)
- [New Concepts in Technical Trading Systems (1978)](https://en.wikipedia.org/wiki/Average_true_range)

Cite as: Cluenex. "How to Set a Stop Loss: Fixed, Trailing and ATR Methods Explained." Cluenex Learn, updated Oct 15, 2026. https://cluenex.com/learn/portfolio-management/stop-loss-methods/