Stop Loss

• A Stop Loss is a type of closing order to automatically close a trade once prices hit a specific level in the market, normally for a loss.
• A Stop Loss is one of the most popular tools for traders to minimise their risk.
• If you are only willing to accept a certain level of loss, a Stop Loss will close the trade once prices hit the the price level you’ve defined.
• A Stop Loss is automatic, meaning you don’t have to manually monitor your positions. This provides a certain level of control and comfort.

Experienced traders will testify that one of the keys to achieving success on financial markets over the long term is prudent risk management. Utilising a Stop Loss is one of the most popular ways for a trader to manage their risk, around the clock.

What is a Stop Loss order?

A stop loss is a type of closing order, allowing the trader to specify a specific level in the market where if prices were to hit, the trade would be closed out by our systems automatically, typically for a loss. This is where the name Stop Loss originates from, because the order effectively stops your losses.

How does a Stop Loss order work in practice?

Source: xStation

Let’s take a look at the example above. The trader has opened a long position on EURUSD in expectation that it will increase in value above 1.09935, which is shown by the first line. You’ll notice a second line below that, which is a Stop Loss set at 1.09842. This means that if the market falls below this level, the trader’s position will be automatically closed at a loss - meaning that the trader is protected from any additional price moves lower.

A Stop Loss helps to manage your risk and keep your losses to an acceptable and controlled minimum amount.

Do Stop Loss orders provide complete protection?

Whilst Stop Loss orders are one of the best ways to ensure your risk is managed and potential losses are kept to acceptable levels, they don’t provide 100% security.

Stop losses are free to use and they protect your account against adverse market moves, but please be aware that they cannot guarantee your position every time. If the market becomes suddenly volatile and gaps beyond your stop level (jumps from one price to the next without trading at the levels in between), it’s possible your position could be closed at a worse level than requested. This is known as price slippage.

Ask our account managers for more details or find out more about risk management in our Trading Academy.