Keret,
Here is a written out explanation of stop loss orders and how they work,
http://www.stocktradingtogo.com/2007...rs-the-basics/
When shorting or buying, you should cut your losses according to what your overall strategy is. I typically recommend cutting losses anywhere from 3 - 8% below your purchase point.
The mentality is such that, if you buy a stock and you lose 20% on it, the stock is going to have to go back up well more than 20% for you to recoop your losses.
Stock Start Price: $100
Stock Drops 20% (-80): $80
To return back to $100, the stock needs to advance $20, or 25%, not 20%.
If you want to dig a little deeper into this topic, I would recommend reading this article on profit vs loss ratios,
http://www.stocktradingtogo.com/2007...vs-loss-ratio/
Hope that helps
.