What a stop loss does
A stop loss is an order that closes a position if the price reaches a level you chose in advance. It limits the loss on a trade, although in fast markets or over gaps the exit price can be worse than the stop level.
Decide the risk first
A common approach is to decide a fixed percentage of the account to risk on each trade, for example 1%. On a $10,000 account that is $100. The percentage is a personal choice and there is no correct number, but small percentages let you survive a series of losses.
The position size formula
Lots = (balance x risk %) / (stop distance x contract size). A $100 risk with a gold stop $5 away and a 100 ounce lot gives 100 / (5 x 100) = 0.20 lots. A wider stop means a smaller position for the same risk.
Where to place the stop
Stops are usually placed beyond a level that would show the trade idea is wrong, such as a recent low or high, and sized with the instrument volatility in mind. A stop so tight that normal price noise hits it will be triggered repeatedly.
Combine it with reward
Compare the distance to your target with the distance to your stop. The ratio shows what win rate you need to break even. A 1 to 2 ratio breaks even at about 33% winners before costs.
Related:Position size calculatorRisk reward calculatorPip calculator
Educational content, not investment advice.