Orders & ExecutionS/LProtective Stop
Stop Loss
A resting order that closes an open position once price reaches a set level, capping the loss on that trade.
What Stop Loss means
A stop loss is a stop order attached to an existing position in the closing direction: below the entry for a long, above it for a short. When the relevant side of the quote reaches the level, the position is closed at market. Its purpose is not to predict anything but to convert an open-ended exposure into a known, bounded loss, which is what makes position sizing possible in the first place. Distance to the stop, contract size and pip value together determine exactly how much capital is at risk.
Because it becomes a market order on trigger, a stop loss caps the intended loss but does not guarantee it. Gaps over the weekend, central bank surprises and flash moves can all produce fills well beyond the level, and the resulting loss can exceed the plan. Brokers that offer guaranteed stop loss orders remove that residual risk for a premium. Stops held on the broker's server continue to work when the trading terminal is closed, whereas some platform-side features do not.
Placement should follow market structure rather than a round number of pips: below a swing low, beyond a volatility band such as an average true range multiple, or outside the noise of the chosen timeframe. Stops clustered at obvious levels are a known source of liquidity, and price frequently trades through them before resuming. Widening or removing a stop as a trade moves against it is the single most common way retail accounts are lost.
Worked example
A trader buys one standard lot of EUR/USD at 1.0850 with a stop loss at 1.0800; the 50 pip distance at USD 10 per pip caps the loss at about USD 500, or 2.5 percent of a USD 20,000 account.
Related terms
- Take ProfitA resting limit order that closes an open position once price reaches a chosen profit level.
- Trailing StopA stop loss that automatically follows price at a set distance, moving only in the profitable direction.
- Guaranteed Stop LossA stop loss the broker contractually fills at the exact level requested, even if the market gaps through it.
- Position SizingThe process of choosing how many lots to trade so that a losing trade costs a predetermined amount of capital.
- Risk Per TradeThe share of account equity a trader is prepared to lose on a single position, normally expressed as a percentage.
Frequently asked questions
What does Stop Loss mean in forex trading?
A resting order that closes an open position once price reaches a set level, capping the loss on that trade.
How does Stop Loss work in practice?
Because it becomes a market order on trigger, a stop loss caps the intended loss but does not guarantee it. Gaps over the weekend, central bank surprises and flash moves can all produce fills well beyond the level, and the resulting loss can exceed the plan. Brokers that offer guaranteed stop loss orders remove that residual risk for a premium. Stops held on the broker's server continue to work when the trading terminal is closed, whereas some platform-side features do not.
What is an example of Stop Loss?
A trader buys one standard lot of EUR/USD at 1.0850 with a stop loss at 1.0800; the 50 pip distance at USD 10 per pip caps the loss at about USD 500, or 2.5 percent of a USD 20,000 account.
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