What a stop loss does

A stop loss is a price chosen in advance to close a position if the market reaches it. For a long, that price sits below the entry. For a short, it sits above the entry. The job of the stop is to name the loss you are using as the exit, before the trade is open.

What a stock stop order does

The SEC's investor bulletin on stop, stop-limit, and trailing stop orders describes a stop order as an order to buy or sell once the stock reaches a specified price, called the stop price. When that price is reached, the stop order becomes a market order.

A sell stop, used on a stock you own, is entered below the current price. A buy stop, used on a short, is entered above the current price. The bulletin's point about the fill is the one to keep: the stop price is the trigger. The price you receive is the price of the market order that follows, and that price can be different when the market is moving quickly.

A stop-limit order adds a limit price. After the stop is reached, the order can only fill at the limit price or better, and it might not fill at all. A trailing stop moves the trigger as the price moves in your favor, and leaves the trigger in place when the price moves against you. Those are variations. Each one still starts from a price that means "close from here."

A planned loss, with and without the stop

These figures are a worked example, not a recorded run. A long position holds 10 units entered at 100.

With no stop, the position is still open when the price is 80. Closing there loses 20 points per unit. Ten units lose 200.

With a stop at 95, the planned exit is 5 points under the entry. Ten units lose 50 if the exit happens at 95.

The stop does not make the 50 certain. On a real stock stop order, a fast market can fill away from 95, which is the warning in the SEC bulletin. The 50 is the loss at the stop price. The 200 is the loss if the position is still open at 80.

What Tradee records

In Tradee, the stop is a price on the modeled position. Take profit is the other price, on the favorable side of the entry. While the position is open, those prices are checked against the market even if the entry rule waits for a bar to close.

That check is not an order sent to an exchange. Tradee does not store exchange keys and does not route orders, so it cannot place a broker stop and it cannot report an exchange fill. A receiver that acts on a Live API event may place its own order. The fill, if any, belongs to that receiver. The modeled book still closes at the modeled stop price used by the simulation.

The distance from entry to stop is also the input for position size. Size the loss before the trade divides an accepted dollar loss by that distance. Without a distance, there is nothing to divide.