What is a stop loss: meaning, types, usage

A stop loss is a type of order that limits losses when the price moves in the trader's favor. It helps investors avoid a significant loss of profit by selling an asset when it reaches a certain price. This tool automatically closes the trade and minimizes the loss. The trader does not need to control the price changes of the selected currency pair or security, and the limits can be set in advance.

Stop loss orders reduce the risk of holding a losing position and are an excellent tool for trading during volatile market conditions. They also help you avoid making impulsive decisions based on fear or greed rather than analysis. By setting exit points, you save yourself from emotional stress and constant monitoring of your investments.

 As a rule, you can set a limit both before and after opening a position, but the price for a trading position should be no less than the current market price for a sell trade and no more than for a buy trade.

Types of stop loss orders

 There are two types of stop loss orders:

 Fixed stop loss

  This is a type of order where the investor sets a predetermined price at a percentage below the market price. The order is automatically triggered for sale when the price reaches the stop price and limits potential losses. You can set such a stop loss, protect your investment and stay on the same level even during market volatility.

Trailing stop loss

  This type of order follows the price as it moves in your favor and automatically closes the position once the price of the currency pair starts moving against you. Thus, trailing stop loss not only limits losses but also captures profits from winning trades depending on the price movement.

What you need to pay attention to before using stop loss

1. Determine the maximum level of losses that you are willing to accept and that will not have a significant impact on your financial portfolio.

2. Pay attention to the volatility of the chosen currency pair. The more volatile it is, the more important it is to set a stop loss.

3. Analyze the peculiarities of your trading strategy and determine the type of stop loss that suits you best.

Advantages and disadvantages of using a stop loss

A stop loss is an effective tool that helps a trader during the process of trading. Its main advantages are:

  - you can minimize losses without limiting your profit potential;

  - automatic order execution frees you from the need to constantly monitor open positions;

  - limits the risk of emotional influence, which helps to improve overall trading performance.

Although a stop loss is a valuable tool in trading, it also has several disadvantages, including:

  - temporary unfavorable market movements can trigger a stop loss, resulting in higher losses than expected;

  - there is a risk of exiting a trade that could potentially bring more profit;

  - market imperfections can lead to stop loss failure in certain situations and cause greater losses.

To set a stop loss, follow these steps:

1. Open a trading account or use a demo account.

2. Perform technical or fundamental market analysis to determine entry points.

3. Choose a stop price level and set a stop order.

4. Determine the position size and place the order.


 A stop loss order can offer many benefits if used effectively. You can try this tool in your trading strategy and prevent excessive losses of your capital. Trading is always a risk, and to minimize it, start using a stop loss.