Stop loss order

A protective instruction attached to an open position, resting on the losing side of it. On a long position it is a sell stop, on a short a buy stop, and in both cases reaching the level converts the instruction into a market order that closes the position at the next price available. Platforms hold it server side once it has been placed, so it remains active whether or not a terminal is connected.

Where the level goes is decided by convention, and there are three families of them. A volatility based convention places it a multiple of a range measure such as average true range away from the entry, so the distance widens as the market becomes more active. A structure based convention places it beyond a swing low or high, on the reasoning that the level being passed contradicts the reason for the position. A money based convention starts from a fraction of account equity and derives the distance and the size together. Each is a bounded convention, not a finding, and they routinely disagree with one another on the same chart.

The single most consequential misunderstanding is that the level is the loss. It is not. The level is a trigger, the fill is whatever the market offers when the order arrives, and in a gap or a fast move those are different numbers, occasionally by a wide margin. A stop therefore bounds an exit decision rather than an amount. In the industry a guaranteed stop is a variant in which a provider undertakes to close at the stated level for a fee whatever the market does, a general market term recorded here for definition and not a description of any YAL product. Protective orders also cluster at visible levels, which is what makes moves through those areas fast.