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A stop loss is an order that automatically closes your trade at a specified price. They are used as a fail-safe mechanism to protect your trading capital in the event that the trade does not work out. Stop losses are therefore vital in protecting your trading capital, but there are different types of stop losses and a number of ways to determine where they should go.

1. Percentage Stop

Percentage stops are based on a percentage of your trading account to limit the total risk of a trade. For example, a trader with a $10,000 account who wants to risk 3% of his trading account on a single trade could place a stop-loss at a level that ensures his total potential loss is $300.

However, there is a huge disadvantage to this method of setting your stop-loss as it does not account for the market conditions and the trade setup that you are in. Remember the cardinal rule of setting a stop-loss is to place your stop-loss order at a point where your trade idea will be invalidated.

2. Technical Indicators Stop

These aren’t hard and fast rules—you don’t have to place a stop-loss order above a swing high when shorting, nor do you have to place it below a swing low when buying. Depending on your entry price and strategy, you may opt to place your stop loss at an alternative spot on the price chart.

If using technical indicators, the indicator itself can be used as a stop-loss level. If an indicator provided you with a buy signal (or a “go long” signal),