#Definition
A stop loss is a predetermined price level at which a trader commits to exit a position to limit losses. When the market price reaches the stop level, the position is closed, either automatically (if the platform supports stop orders) or manually by the trader.
In prediction markets, where losing positions go to zero at resolution, stop losses provide a way to exit before total loss. A trader who bought Yes shares at 0.45, accepting a 25% loss rather than risking the full position if the market moves against them.
#Why It Matters in Prediction Markets
Stop losses serve several critical functions for prediction market traders:
Limiting downside risk
Binary markets resolve to 1; there's no middle ground. Without stop losses, a wrong prediction costs 100% of the position. Stop losses cap losses at manageable levels, preserving capital for future opportunities.
Enforcing discipline
Traders often hold losing positions hoping for recovery, a behavior called "hope trading." Stop losses remove this emotional decision, automatically enforcing the exit plan created when thinking clearly.
Protecting against events
News can move prediction markets dramatically. A candidate's scandal, an unexpected economic release, or a policy announcement can gap prices past comfortable holding levels. Stop losses ensure you're not caught in positions during adverse events.
Enabling position sizing
When you know your maximum loss (position size × distance to stop), you can size positions appropriately. This connects directly to risk management; without defined exits, risk is undefined.
Freeing attention
Active monitoring is exhausting. Stop losses let traders step away knowing they won't suffer catastrophic losses while not watching.
#How It Works
#Types of Stop Losses
Hard stop (automatic)
An order placed with the platform that executes automatically when triggered. Most common in traditional finance but less available in prediction markets.
Order: Sell 100 Yes shares if price falls to $0.45 or below
Trigger: Market price reaches $0.45
Execution: Market order to sell immediately
Mental stop (manual)
A price level the trader commits to exit at, requiring manual execution. Common in prediction markets where platforms lack native stop functionality.
Commitment: "I will sell if price drops to $0.45"
Trigger: Trader observes price at $0.45
Execution: Trader manually places sell order
Trailing stop
A stop that moves with favorable price movement, locking in gains while limiting losses.
Initial: Buy at $0.50, trailing stop at $0.40 (10 cents below)
Price rises to $0.70: Stop moves to $0.60
Price falls to $0.60: Stop triggers, position closed
Result: Locked in $0.10 profit despite reversal
#Stop Loss Trigger Mechanism
#Numerical Example
A trader analyzes an election market:
Entry decision:
- Current price: $0.55 (55% implied probability)
- Trader believes true probability: 70%
- Buys 200 Yes shares at 110 invested
Stop loss placement:
- Stop level: $0.40 (below technical support)
- Maximum loss if stopped: 200 × (0.40) = $30
- Maximum loss as percentage: 27% of position
Scenario A (price rises):
- Price rises to $0.75
- Trader adjusts stop to $0.60 (trailing stop behavior)
- Price continues to $1.00 at resolution
- Profit: 200 × (0.55) = $90
Scenario B (price falls):
- Negative news drops price to $0.38
- Stop at $0.40 triggers
- Sells at approximately $0.39 (some slippage)
- Loss: 200 × (0.39) = $32
- Capital preserved: 32 = $78 for next trade
Without the stop loss, if the market resolved No:
- Loss: 200 × 110 (total position)
The stop loss reduced maximum loss from 32, a 71% reduction in risk.
#When to Use Stop Losses
Use stop losses when:
- Position size is meaningful relative to your bankroll
- You cannot monitor positions continuously
- The market is volatile or event-driven
- You're trading on technical or short-term factors
- You want defined risk for portfolio management
Consider skipping stop losses when:
- You have high conviction based on fundamental analysis and can tolerate volatility
- Position size is trivial
- Liquidity is so thin that stop execution would be at terrible prices
- You're providing liquidity and expect temporary adverse moves
#Examples
#Example 1: Event Protection
A trader holds Yes shares on "Fed will raise rates in March" at $0.65. The Fed meeting is tomorrow.
Without stop loss: If the Fed holds rates, price crashes to $0.10. Loss: 85% of position.
With stop loss at $0.50: If early leaks suggest no hike, the stop triggers before the official announcement. Loss capped at 23% of position.
#Example 2: Disciplined Exit
A trader buys a candidate at 0.35, 0.25...
Without stop loss: Trader keeps holding, rationalizing "it will come back." Position eventually resolves to $0. Total loss.
With mental stop at $0.32: Trader exits with 20% loss despite temptation to hold. Capital preserved.
#Example 3: Trailing Stop Profit Lock
A trader catches a momentum move on an economic indicator market:
- Entry: $0.45
- Price rises: 0.60, 0.80
- Trailing stop (15 cents behind): 0.45, 0.65
- Price reverses to $0.65, stop triggers
- Profit locked: $0.20 per share (44% gain)
Without trailing stop, the reversal might have continued to below entry.
#Example 4: Slippage Reality
A thin market has a 0.65 ask. Trader sets stop at $0.55.
Bad news hits: Next trade is at $0.40 as orders gap through.
- Stop triggered at $0.55
- But execution happens at $0.38 (next available bid)
- Actual loss: 42% instead of planned 25%
This illustrates "gap risk": stops don't guarantee execution at the stop price.
#Risks, Pitfalls, and Misunderstandings
Stop hunting
In some markets, sophisticated traders or market makers identify where stops cluster and push prices to trigger them before reversing. Your stop at obvious levels ($0.50, round numbers) may be targeted.
Premature exit
Stop losses can trigger on temporary volatility, exiting you from positions that would have been profitable. The market dips to your stop, you exit, then it rallies. This is the tradeoff: stops limit losses but can also limit gains on volatile but ultimately correct positions.
Slippage and gaps
Stops don't guarantee execution at the stop price. Fast-moving markets can gap through your stop level. Your 0.42 or worse.
Not available on all platforms
Many prediction market platforms, especially AMM-based ones, don't offer native stop-loss orders. Traders must monitor manually or use alerts, which is less reliable than automatic execution.
False sense of security
Having a stop loss doesn't eliminate risk; it transforms unlimited loss into defined loss. You can still lose the amount between entry and stop. Stop losses are not a substitute for proper position sizing.
Mental stops require discipline
Self-imposed stops only work if you actually execute them. Many traders set mental stops, then rationalize not selling when the price is reached. "It's just temporary." Without discipline, mental stops are meaningless.
#Practical Tips for Traders
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Set stops before entering positions: Decide your exit point when your thinking is clearest, not when you're watching a loss grow
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Place stops at meaningful levels: Rather than arbitrary percentages, use technical levels, support/resistance, or probability thresholds that would change your thesis
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Account for platform limitations: If your platform lacks native stops, set price alerts and commit to acting on them. Consider the reliability of your monitoring
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Size positions based on stop distance: If your stop is 20% below entry, and you can risk 500. Stop placement drives position sizing
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Avoid clustering at obvious levels: Round numbers and common retracement levels attract stop hunters. Place stops slightly beyond obvious levels
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Accept that stops cost money: You will sometimes be stopped out of positions that would have won. This is the cost of risk management. Evaluate stops by their overall portfolio impact, not individual trades
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Use trailing stops to protect profits: Once a position is profitable, consider raising your stop to lock in gains while allowing room for continued movement
#Warning: Stop Hunting
In illiquid prediction markets, "Stop Hunting" is a real risk.
- Scenario: You set a stop loss at 0.50.
- Attack: A manipulator sells a small amount down to 0.50.
Advice: Be careful using automated stop losses in thin markets. Mental stops (alerts) are often safer.
#Related Terms
#FAQ
#Do prediction markets have automatic stop losses?
Most prediction market platforms lack native stop-loss functionality, especially decentralized platforms using AMMs. Some centralized platforms like Kalshi may offer more advanced order types. Traders often use price alerts and manual execution as substitutes.
#Where should I place my stop loss?
Stop placement depends on your analysis. Consider: technical support levels, the price at which your thesis would be invalidated, the maximum loss you can tolerate, and liquidity at various price levels. Avoid placing stops at obvious round numbers where they're likely to be triggered by noise.
#What's the difference between a stop loss and a limit order?
A stop loss triggers when price moves against you, converting to a market order to exit. A limit order specifies the price at which you're willing to buy or sell. A stop-limit combines both: it triggers at the stop price but then executes as a limit order, potentially not filling if the market gaps through your limit.
#Can stop losses guarantee I won't lose more than expected?
No. Stops can experience slippage; the execution price may be worse than the stop price in fast-moving or illiquid markets. For hard limits on loss, some traders use options or position sizing that they're prepared to lose entirely. Stops reduce expected maximum loss but don't guarantee it.
#Should I use stops on every trade?
Not necessarily. For positions you're holding to resolution with high conviction, stops might exit you from temporary volatility. For larger positions, speculative trades, or markets where you can't monitor continuously, stops are more valuable. Match your stop strategy to your trading style and the specific market characteristics.