What is a stop-loss order?
At a glance:
• A stop-loss order helps to limit losses by setting a trigger level. When this level is reached, a sell order is placed at the best available price.
• It acts as a risk control mechanism, particularly during periods of market volatility. In such markets, the execution price can differ significantly from the set level.
• With Carregosa NextGen, you can develop a consistent investment strategy that is aligned with your goals.
It’s a Monday like any other. You’re busy, with a thousand things on your mind. You haven’t had time to watch the news, let alone keep up with the financial markets.
Meanwhile, the company in which you invested a few months ago has just released its results. They were well below expectations. Within minutes, the share price drops significantly.
By the time you finally check your portfolio, it will already be too late.
Without a stop-loss order in place, a situation like this could undo months, or even years, of gains. But what if you had used this tool? The order would have been triggered when the price reached the set level and the sale would have been attempted at the best available price, which could have been lower than the stop price.
Put simply, a stop-loss order is triggered when the price reaches ‘X’.
Although it seems simple (and it is), there are a few things to bear in mind, such as how to select the right level. When should the order be reviewed? Read on to find out everything you need to know about stop-loss orders and how to set them up according to your strategy.
What is a stop-loss order?
In a long position, a stop-loss order is an instruction that automatically sells an asset when its price falls to a level that you have previously set, known as the ‘stop price’ or ‘trigger price’. The logic is reversed in a short position: the stop is a buy order placed above the market price.
For example, if you buy a share for €50 and set a stop-loss order at €45, the order will be triggered as soon as the share price falls to €45. From there, the asset is sold at the best available price at that moment. Under normal conditions, this is around €45, but it may be lower – sometimes significantly so – in the event of a gap, low liquidity, or high volatility.
The aim is simple: to limit losses. By setting a stop price, you establish a planned level of loss in advance, rather than a guaranteed maximum loss, so you don’t have to constantly monitor the market.
"A stop-loss isn’t about trying to predict the market’s highest or lowest point; it’s about making a rational decision about how much you’re willing to risk before letting your emotions take over.” — João Queiroz, Head of Trading at Banco Carregosa.
Another option is the stop-limit order. When the stop price is reached, the order becomes a limit order and can only be executed at the limit price or better. The order may remain fully or partially unexecuted.
What’s the difference between a stop-loss order and a take-profit order?
Although they serve different purposes within an investment strategy, stop-loss orders and take-profit orders are two complementary risk management tools.
The table below assumes a long position, i.e. when you have bought an asset in the hope that its value will increase, which is the most common scenario. The logic is reversed in a short position.
| Stop-loss order | Take-profit order | |
|---|---|---|
| Objective | To limit losses | To take profits |
| The trigger point | When the price falls to the pre-set level | When the price rises to the pre-defined level |
| Role in the strategy | Potentially limit losses | Exit at a target price if the order is executed |
These enable you to plan exit levels without ensuring that the result will fall within that range. When set up as an OCO (one-cancels-the-other) pair, execution of one order cancels the other. This contributes to a more disciplined approach that is less influenced by emotions.
Recommended reading
A stop-loss order is designed to limit losses, while a take-profit secures gains when the target price is reached. Read our article Take-profit order: what it is and how it works to find out how it works.
Benefits of a stop-loss order
In the context of risk management, using a stop-loss order can offer several significant benefits, particularly for those investing in assets subject to frequent price fluctuations. Find out about the main benefits of a stop-loss order.
Discipline in decision-making
Setting an exit level in advance reduces the likelihood of making impulsive decisions in high-pressure situations, such as sharp market falls. This approach helps you to manage your investments more consistently.
"A stop-loss is more than just a protective tool; it’s about discipline. It forces you to define the risk before investing, rather than when the market is falling.” — João Queiroz, Head of Trading at Banco Carregosa.
Controlled loss limitation
The primary purpose of a stop-loss is to establish a predetermined loss threshold, although the actual loss incurred may exceed this level. This helps protect your capital, preventing a single decision from disproportionately impacting your entire portfolio.
Less need for constant monitoring
If you have an active stop-loss order in place, there is no need to continuously monitor the market in case of adverse movements. Although execution depends on liquidity, market conditions, the order’s validity and trading hours, automatic triggering reduces the need for constant monitoring.
A useful tool in volatile markets
In more volatile markets, where prices can fluctuate rapidly, a stop-loss order provides an extra layer of protection. Although it does not eliminate risk, it enables you to respond to unexpected movements in a more structured way. However, the greater the volatility, the higher the risk of the stop-loss being triggered by temporary price fluctuations, resulting in the order being executed at an unfavourable price.
Risks of stop-loss orders
Although there are advantages to using a stop-loss order, there are also limitations that must be understood before placing one.
Execution at prices different from those expected
In high volatility scenarios or low liquidity, the execution price may differ from the initially set level. The reason is that, when triggered, the order is usually converted into a market order and executed at the best available price at that moment. The trigger criteria (whether it is the last trade, the bid or the ask) may vary depending on the instrument and the platform.
Recommended reading
Many sudden price movements and gaps that affect your stop-loss occur around predictable events, such as company results or decisions made by central banks. Check the key scheduled events and prepare your risk management strategy in the "Economic calendar: 10 key events for investors”.
Triggering during short-term price movements
Even when the underlying trend remains intact, occasional price swings can trigger a stop-loss order. This can result in investors exiting their positions too soon and missing out on potential future gains.
False sense of protection
Although a stop-loss order is an effective tool for limiting losses, it does not eliminate market risk. Unexpected events, such as news announcements or opening gaps, can cause prices to fluctuate suddenly and exceed the set level.
Possible misalignment with long-term strategies
If you are making long-term investments, you should carefully consider using stop-loss orders. An overly reactive approach may not work well with a strategy based on gradual appreciation over time.
How to use a stop-loss order
The effectiveness of this tool depends largely on how it is integrated into your overall strategy. Read on to find out how you can use a stop-loss order consistently and in line with your objectives.
1. Clearly define your risk tolerance
The first step is to decide how much you can afford to lose on a given investment without compromising the balance of your portfolio. When making this decision, you should take into account your risk profile, your investment time horizon, and the importance of this asset within your overall investment portfolio.
Planned risk ˜ number of units × the difference between the entry price and the stop, before costs and slippage.
2. Avoid levels that are too close to the current price
One of the most common mistakes, particularly amongst less experienced investors, is placing a stop-loss order too close to the entry price. This approach may result in frequent triggering of the order due to normal market fluctuations, despite there being no significant change to the investment scenario.
It is important to let assets follow their natural course, rather than making overly reactive decisions in response to short-term movements. However, bear in mind that a wider stop also means greater potential losses if it is triggered. Therefore, the distance of the stop is not a decision made in isolation – it is closely linked to the amount you decide to invest.
3. Set your stop-loss according to your investment strategy, rather than your entry price
The best way to make this decision is as follows:
1. First, establish the point at which your investment thesis no longer applies. Ask yourself: at what price would I no longer believe in the reasons that led me to buy? This is your stop-loss level, which should not be chosen randomly or based on a round percentage.
2. Next, adjust the amount you invest according to your risk tolerance. If you’re prepared to risk a maximum of €100 on this position and your stop-loss is set 20% below your entry price, the position size should be around €500 or less (20% of €500 is €100). If the stop had to be set at 10% below, you would need to invest around €1,000 to achieve the same level of risk.
In other words, setting a stop further away should result in a smaller position. Therefore, the maximum risk remains unchanged, regardless of the asset’s volatility.
4. Consider the asset’s volatility and behaviour
You should take the specific characteristics of the asset into account when setting the stop-loss level. More volatile shares require wider margins and, by the above logic, smaller positions, while more stable assets allow for tighter stop-loss levels.
The analysis of factors such as historical price movements and the current market context can help you to place orders more effectively. Although there is no guarantee that they will hold, support zones (levels at which the price has historically slowed its decline) can serve as a reference point. Moving the stop slightly below these levels may reduce the number of triggers caused by minor fluctuations, but it will not eliminate them entirely.
5. Adjust the stop-loss order according to the performance of the investment
A stop-loss order should not be considered a definitive decision. It may make sense to review the level initially set as the asset’s price evolves, particularly when the position is making a profit.
When holding a long position, it is usually advisable to tighten the stop to protect gains, bringing it closer to the current price and securing part of the appreciation already achieved. This is the logic behind the trailing stop, also known as the dynamic stop, which tracks price increases while maintaining a defined distance.
The reverse requires much greater caution: moving the stop further away to prevent the order from being executed increases the risk you initially agreed to take. However, if you conclude that the initial level was poorly defined, this adjustment must be accompanied by a reduction in exposure to keep the maximum risk within your planned limits.
This review should form part of your strategy and be carried out in a structured manner, rather than being an impulsive reaction to short-term price movements.
6. Integrate the stop-loss order into a broader strategy
Finally, stop-loss orders should be used as part of a broader investment strategy. This tool should be used alongside other elements, such as:
• Portfolio diversification;
• Setting clear objectives;
• Regular monitoring of the markets.
The stop-loss order is not a stand-alone solution; it is one component of a broader decision-making process that requires consistency, discipline, and a long-term perspective.
Quick glossary
• Trailing stop (dynamic stop): a type of stop-loss order that tracks the price as it moves in your favour, maintaining a fixed distance or percentage that you define. The order is triggered if the price reverses and moves that distance in the opposite direction. This helps to protect your gains without you having to adjust the level manually.
• Stop-limit: this is a variant whereby, once triggered, the order becomes a limit order — meaning it will only be executed at the limit price you have set or at a better price. Although it gives you control over the execution price, it may not be executed if the market quickly moves beyond that limit, or it may only be partially executed if there is insufficient volume at the limit price.
• Slippage: the difference between the expected price and the price at which the order is actually executed. It is common during periods of low liquidity or high volatility.
• Gap: a gap is a sudden jump in price between the close of one session and the opening of the next (or following major news), which can result in an order being executed well below the stop level.
When should you review your stop-loss?
You should not set a stop-loss and then ignore it. It makes sense to review the level as the market changes or your position evolves. It is worth doing so:
• When the price rises consistently. You can then tighten the stop to protect your gains.
• When news or results emerge that change the company’s outlook.
• When the asset approaches your target or the market enters a more volatile phase.
• When the order is about to expire. Orders may be valid for a day, a set period, or until they are cancelled. If a stop-loss expires, your position will be left unprotected without your knowledge.
• Following dividends, share splits or other corporate actions. The price may adjust without your investment thesis changing, which could trigger an unadjusted order solely because of this technical adjustment.
In which assets and contexts can a stop-loss order be used?
Although a stop-loss order can be used on virtually any instrument traded on the market, its effectiveness depends heavily on the prevailing trading conditions.
Execution tends to be more predictable in liquid instruments that are regularly traded and have narrow spreads, such as large-cap shares and ETFs that track broad indices. In these cases, there are usually sufficient counterparties for the sale to be completed at or near the defined level.
However, greater caution is required when trading in small caps, biotechnology or cryptoassets due to price gaps and low liquidity: your order may be executed well below your stop level. This does not mean that you should avoid using it. It simply means that the protection is less precise, so position sizing becomes even more important (as we saw earlier).
Stop-loss order: invest with confidence with Carregosa NextGen
The first step towards becoming a disciplined and informed investor is understanding what a stop-loss order is. Instead of trying to predict the market, the focus should be on knowing how to manage risk and protect your capital over time.
Carregosa NextGen provides you with tools that allow you to set stop-loss orders and monitor your investments in a structured way. By accessing the GoBulling Investor platform and its specialist analysis content, you can incorporate this type of order into a strategy tailored to your profile and objectives. The availability, validity and conditions of orders depend on the instrument and market in question.
With a history spanning over 190 years, Banco Carregosa is a well-established institution regulated by Banco de Portugal (under no. 0235) and the CMVM (under no. 0169). It is also Saxo Bank’s longest-standing international partner and has over 25 years’ experience in international electronic trading.
Contact us to find out how you can invest with greater control and confidence.
Stop-loss order: FAQs
In the following section, we address the most frequently asked questions regarding stop-loss orders.
Will a stop-loss order guarantee that I won’t make any losses?
No. Although a stop-loss order helps to limit losses, in volatile markets the execution price may be lower than the specified level.
Can I change a stop-loss order?
Yes, you can request a change or cancellation while your order is still pending. This will only take effect once it has been confirmed by the platform. However, it may no longer be possible to make the change if the order has been triggered or executed, either in full or in part.
At what level should I set a stop-loss order?
You should set the stop-loss order level based on your risk tolerance, the volatility of the asset and your investment strategy. Avoid setting it too close to the current price so that it is not triggered by normal market fluctuations. Instead, aim to set it at levels that make sense in the context of your investment. Set the level, then adjust the amount invested so that the planned loss is in line with the maximum risk you are willing to accept.
Legal disclaimer: This article has been prepared by Banco Carregosa for information and educational purposes only. Under no circumstances does it constitute an investment proposal, recommendation to purchase, or personalised financial advice. Investing in financial instruments carries risks, as well as the possibility of losing the invested capital. Past performance is no guarantee of future returns. You should consult your account manager or financial advisor before making any financial decisions to assess whether they are suitable for your risk profile and financial objectives.