A Stop Loss is a risk management tool that allows a trader to set a predefined price level at which an open position will be automatically closed to limit potential losses. Once the market reaches the specified stop loss price, the system sends an order to close the position at the next available market price.
Stop Loss orders help traders manage downside risk without needing to monitor the market continuously. However, execution is subject to market conditions, and during periods of high volatility or gaps, the final execution price may differ from the requested level.
Example:
You buy EUR/USD at 1.1000 and set a Stop Loss at 1.0950.
If the market falls to 1.0950, your position will automatically close, limiting your loss to approximately 50 pips (excluding spreads and slippage).
Why Use a Stop Loss?
Protects trading capital
Defines risk before entering a trade
Reduces emotional decision-making
Supports disciplined trading strategies