Definition
Stop-LossA stop-loss is an order that closes a trade automatically at a preset price to cap the loss if the market moves against you.
Example
A trader buys EUR/USD at 1.0900 with a stop-loss at 1.0870. If the bid falls to 1.0870, the position closes, limiting the loss to about 30 pips plus any slippage.
In detail
A stop-loss turns "I'll get out if it goes wrong" into an instruction the platform carries out for you. Once price reaches the stop level, the order becomes a market order and closes the position at the next available price.
- For a long (buy) trade, the stop sits below the entry and is triggered by the bid price.
- For a short (sell) trade, the stop sits above the entry and is triggered by the ask price.
Types of stop-loss
- Standard stop: fixed at one price.
- Trailing stop: moves in your favor as price moves, locking in part of an open profit, but never moves backward.
- Guaranteed stop: offered by some brokers for a fee; it fills at your exact price even if the market gaps.
Where to place it
A stop works best at a level that, if reached, shows your trade idea is wrong. Common approaches include placing it beyond support or resistance, beyond a recent swing point, or at a multiple of the pair's average range. Placing it at an arbitrary number of pips, or too close to normal noise, often leads to being stopped out by routine fluctuations.
Example
Assume (illustratively) a $6,000 account with a 1% risk limit ($60). A trader plans to sell USD/JPY at 150.40 with a stop at 150.80.
- Stop distance: 150.80 − 150.40 = 0.40, or 40 pips
- Allowed risk per pip: 60 ÷ 40 = $1.50
- Pip value per standard lot at about 150.40: 1,000 ÷ 150.40 = about $6.65
- Position size: 1.50 ÷ 6.65 = about 0.23 lots
The stop distance comes first; the lot size follows from it.
Why it matters
A stop-loss is one of the most basic risk management tools. It does not guarantee the exact exit price, because slippage can occur in fast markets or over weekend gaps. Moving a stop further away to "give the trade more room" after entry is a common habit that turns small planned losses into large unplanned ones.
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Related terms
- Take-ProfitA take-profit is a limit order that closes a trade automatically once price reaches a preset target, locking in the gain without needing to watch the screen.
- Risk ManagementRisk management is the set of rules a trader uses to limit losses, such as capping risk per trade, using stop-losses and controlling total exposure.
- SlippageSlippage is the difference between the price you expected for an order and the price at which it was actually filled. It can be negative or positive.
- SupportSupport is a price level or zone where a falling market has repeatedly stopped and bounced, because buying interest has tended to appear there.
- DrawdownDrawdown is the decline in an account or strategy from a peak value to a subsequent low, usually expressed as a percentage of that peak.