Stop losses are risk-management tools, not prediction tools.
The two most common types — fixed stops and trailing stops — encode very different assumptions about volatility, trend persistence, and risk tolerance. Understanding their differences matters more than choosing one over the other.
What a stop loss represents
A stop loss defines where a trade is exited when price moves against you.
It answers:
- How much downside am I willing to tolerate?
- When do I accept that the thesis is invalid or overstretched?
Stops control path risk, not outcomes.
What a fixed stop is
A fixed stop is set at a constant distance from the entry price.
Characteristics:
- does not move once placed
- defines maximum loss upfront
- simple and predictable
- insensitive to subsequent price action
Example:
- Entry at $100
- Fixed stop at −20% → $80
What a trailing stop is
A trailing stop moves up (or down) as price makes new favorable extremes.
Characteristics:
- locks in gains as price rises
- adapts to trend progression
- never moves against the position
- sensitive to pullbacks
Example:
- Entry at $100
- Trailing stop at −20%
- If price rises to $150, stop moves to $120
Core difference between fixed and trailing stops
The difference is what they protect.
- Fixed stops protect capital
- Trailing stops protect profits
As a result:
- fixed stops prioritize loss limitation
