What Is a Stop Loss? How It Works, Where to Put It, and 30 Years of Hit Rates

Michael Whitman · Trading since 2017, full-time since 2020 · YouTube creator, 137K subscribers · Published 2026-09-05 · Updated 2026-11-02 · Reviewed 2026-11-01

A stop loss is an order that closes your trade automatically once price reaches a level you set in advance, so the size of the planned loss is decided before the money is at risk. It is an instruction, not a promise: when a market opens past your price, the order fills at the next price available. This page shows the three order types, one real trade where they behaved differently, and how often stops of 2% to 20% were reached on SPY and eight large stocks.

How it works

You choose a stop price, and the broker holds the order until price gets there. For a long position it is a sell stop, placed below the current price. For a short position it is a buy stop, placed above it. Either way you do not have to be watching, and you do not have to decide anything in the moment.

That last part is the point. The decision is made before money is on the line, the only moment it can be made calmly.

What counts as “reached” depends on the firm. The SEC’s investor bulletin notes that some brokers trigger a stop on the last sale price and others on quotes, and that a short-lived intraday drop can fire a stop and fill it well below the day’s close. Ask your broker which rule it uses.

Stops are a trading tool, not an investing one. If you are buying a broad fund to hold for years, a normal dip would trigger a stop and sell you out of a holding the plan expected to fall and recover, the same point the dollar cost averaging page makes about regular investing.

Stops just under a breakout level get tested often: SPY came back below it after 76.68% of fresh 20-session breakouts, as measured in Donchian channels vs ATR.

Three kinds of stop order

A stop-market order becomes a market order when your price is reached. It gets you out at whatever price is available, which may be worse than your line.

A stop-limit order becomes a limit order instead. It will not fill worse than your limit, and in a fast move that means it may not fill at all, leaving you in a position you thought was closed. For a stop whose job is getting you out, the market version is the one that does it.

A trailing stop sets the stop a fixed percentage or dollar amount behind the best price since you entered. It moves up as a long position rises and never moves back down. The trailing stop page covers how far behind to set it.

Of 2,006 triggered SPY sell stops placed 1% under the prior close since 1993, 382 (19.04%) were filled at an open that had already gapped through, as stop order shows.

A worked example: one SPY trade, two stops

The entry. Buy SPY at the close of 2 January 2025, $584.64, the first session of the year. Put a fixed sell stop 10% below, at $526.18, and beside it a 10% trailing stop that starts at the same price.

The size comes from the stop. On a $25,000 account risking 1%, the budget is $250. The distance to the fixed stop is $58.46 a share, so the position is 4 shares, a planned loss of $233.86. Sizing like this is the method on the position sizing page.

The trailing stop climbs. SPY’s high reached $613.23 on 19 February 2025, lifting the trailing stop to $551.91, 10% under that high. Then SPY fell. On 13 March it opened at $558.49 and traded down to $549.68, through the trailing stop, which sold at about $551.91: a loss of $32.73 a share, $130.92 on 4 shares.

The fixed stop is gapped through. On 3 April SPY closed at $536.70. On 4 April it opened at $523.67, already $2.51 below the $526.18 stop, so the stop-market order filled at about the open: a loss of $60.97 a share, $243.88 on 4 shares, slightly more than the $233.86 planned. SPY’s low came the next session, $481.80 on 7 April.

What the example shows. The trailing stop cut the loss nearly in half because it had moved up before the fall started. The fixed stop did what a stop-market order does in a gap: it got out, at a worse price than its line. And both exits came before a recovery: SPY closed back above the entry, at $586.84, on 13 May 2025, and closed at $755.72 on 30 October 2026. A stop limits what a wrong trade costs; it cannot tell a wrong trade from a dip.

Nasdaq’s own daily bars match Yahoo’s to within a cent on all 74 sessions from 2 January to 21 April 2025. Every session and both stop levels are in the trade file.

Where to put it

1. Beyond a level on the chart

Put it past a swing low, a level or the edge of a range. This is the only method where the price means something: it marks the point at which your reason for the trade has stopped being true.

2. A fixed percentage

Simple and consistent, and it takes no account of how much the instrument moves. The same 5% is a wide stop on a quiet fund and a tight one on a volatile stock.

3. A multiple of recent range

Place the stop a multiple of the average true range away. It adapts to the instrument, but it still does not know where the levels are.

4. Time

Close the trade if it has not done what you expected within a set number of sessions, because money tied up in a trade going nowhere is not available for the next one.

Too tight is the common mistake. A stop inside the ordinary daily range gets hit by nothing in particular: on SPY since 1996, a 2% stop was reached within 20 sessions after 55.05% of closes. Too wide is a trade-off, not an error, because with the same money at risk a wider stop simply means a smaller position, the arithmetic on the risk management page.

The original data

What was measured. Every daily close after the first in each series was treated as an entry, so SPY entries start on 3 January 1996 and the stocks on 4 January 2000. A sell stop was placed a fixed percentage below that close, and it counts as hit if any later day’s low reached it within the next 20 or 60 sessions. If that day opened below the stop, the stop was gapped through.

Prices are Yahoo Finance daily bars downloaded 3 October 2026, adjusted for splits but not dividends, as a resting order sees them. Entries overlap, so these are shares of start days, not independent trials.

A wider stop is reached less often, and more of its hits arrive as gaps. Of the 310 times a 20% stop on SPY was reached within 60 sessions, 120 opened below it. The 7%, 8% and 20% rows are in the wide-stop file, and the 2%, 5% and 10% rows in the stop grid.

A fixed percentage is a different stop on every stock. The same 5% stop over 20 sessions, with each name’s median daily high-to-low range for scale:

The ranking follows the range. These are stocks that are large today, so the list leaves out companies that shrank or vanished. NVDA’s split-adjusted close rose about 2,400-fold from 3 January 2000 to 2 October 2026, so its high hit rate came on the way up, not from a falling stock. The per-stock table is published.

On one fund, volatility moved the number threefold. Splitting SPY’s entry days into thirds by the standard deviation of the previous 20 daily returns, a 5% stop was hit within 20 sessions after 12.00% of the 2,566 entries in the calm third (under 0.71% a day; the exact cut is 0.7071%), 21.20% in the middle and 35.54% in the volatile third (1.10% a day or more; the exact cut is 1.1023%); the volatility table is published too.

A range-based stop evened that out. A stop two of Wilder’s 14-day average true ranges below the entry close, tested on the same entries from the 16th bar of each series to 3 September 2026, was hit within 20 sessions after 42.34% to 46.53% of closes on all nine names, a spread of 4.18 points against 36.37 for the flat 5% (22.90% on SPY to 59.27% on NVDA on those entries).

It is not simply a wider stop: the median two-range stop sat 2.49% below the entry on SPY and 7.61% on NVDA, so on quiet SPY it was hit about twice as often as 5%. The stop comparison file has every name, and Nasdaq’s own daily bars for 24 October 2016 to 2 October 2026 give two-range hit shares within half a point of Yahoo’s on all nine.

What equal hit rates do not buy. The same 20-session odds came with a stop three times as far away on NVDA as on SPY, so the same dollars at risk buy about a third of the position. And a hit rate says nothing about whether the trade itself would have worked.

In the search study behind this site, 307 of 24,971 videos have stop loss in the title, at a median of 7,126 views; 76% never pass 50,000.

Questions people ask

What is the 7% rule for stop loss?

It comes from William O’Neil, founder of Investor’s Business Daily, who said in a 2002 Motley Fool interview that he sells any stock that falls 7% or 8% below his purchase price, without exception. On the data above, a 7% stop was reached within 60 sessions after 28.80% of SPY closes and 61.63% of NVDA closes, so the same rule is a loose stop on a fund and a tight one on a fast stock.

What is the golden rule for stop loss?

There is no official one. The rule most traders mean is the one in the box on this page: choose the price from the chart first, size the position from that distance, and never move the stop further away once the trade is open.

Is 20% a good stop loss?

It is a wide one. A 20% stop on SPY was reached within 60 sessions after only 4.04% of closes, but 38.71% of those hits opened below it, and with 1% of the account at risk it allows a position about a fifth the size that a 4% stop would.

Is a stop loss a good idea?

For a trade, yes: it caps what being wrong costs and takes the decision out of the moment. For a long-term holding in a broad fund, the SPY example above shows the cost: both stops sold before a recovery.

When it fails

It does not fill where you put it

The stop price triggers the order; it does not promise the fill. The largest gap through a 5% stop in SPY’s daily record since 1996: a stop under the 30 August 2001 close of $113.32 sat at $107.65. Markets closed after the attacks of 11 September and SPY reopened on 17 September at $101.00, $6.65 below the stop. A stop-market order filled near the open, a loss of 10.87% instead of 5%. A stop-limit at $107.65 would not have filled at all that day, because the high was $106.40.

The percentage ignored the instrument

The same 5% was reached within 20 sessions after 22.90% of SPY closes and 59.27% of NVDA closes. Carry the SPY habit to NVDA and the stop goes off more often than not, before the idea has had a month.

You moved it

Moving a stop away from price is not patience. It turns a planned, survivable loss into an unplanned one of unknown size, and it feels reasonable every single time.

You chose the price to fit the position

If the stop keeps ending up wherever makes the position size comfortable, the chart is not choosing it. That is the failure the risk management page is built around.

Related

Risk management is the page this one feeds: the stop gives you a distance, and the distance gives you a position size. Swing highs and lows are where the best stop prices come from, because they are prices the market made. And liquidity explains why the obvious stop price is the one most likely to be reached.

This page is educational, not financial advice. Test every idea on your own charts before risking money.