A level set where you'll say no more:the stop-loss shows the trade the door.
An order attached to a position to close it if the price moves against the trader to a specified level.
Once the level is reached it becomes an order to close at the best price available, which can be worse than the level set in a fast market or after a gap.
In plain words
A stop loss is an instruction attached to a position to close it if the price moves against the trader to a chosen level. For a position that was bought it sits below the current price; for one that was sold it sits above.
See it move
Current price has reached Take profit
Why it matters
It fixes in advance the loss a trader plans to accept, and it works without the trader watching the screen. The distance to the stop, together with the size of the position, determines the amount at risk.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
A trader buys one standard lot of EUR/USD at 1.1000 with a stop loss at 1.0970.
- 1Distance to the stop1.1000 − 1.0970 = 30 pips.
- 2Planned loss30 × 10 US dollars = 300 US dollars.
- 3If the market jumps past the stop and the first price available is 1.0960, the loss is 40 pips, or 400 US dollars.
The stop sets the planned loss at 300 US dollars, but the actual loss depends on the price at which the order is filled.
A common mistake
A stop loss is not a guarantee of the exit price. Once the level is reached it becomes an order to close at the best price available, which can be worse in a fast market or after a gap.
Check yourself
Learn more
- Academy lessonThe risk-reward ratioHow the risk-reward ratio and expectancy are calculated, the break-even win rate each ratio implies, and the mistakes that quietly change the ratio.
- Academy lessonPosition sizingLot sizes, the percent-risk model, fixed-fractional sizing and the Kelly criterion, with the formulae and a worked example.
- GuideFive risk management rules for leveraged tradingRisk per trade, stop placement, the reward-to-risk arithmetic, correlated exposure and a written plan: five habits that limit how much a single mistake can cost.
- GuidePosition sizing: the arithmetic of risk per tradeFixed percentage, fixed amount, Kelly and volatility-based sizing, with the formula and a worked example for each.
Educational information, not investment advice or a recommendation to trade.