A stop loss is a pending order that automatically closes a position when the price reaches a specified level, limiting the maximum loss on a trade. It is the most fundamental risk management tool in trading. Once triggered, a stop loss becomes a market order and is filled at the best available price, which may differ from the stop level in fast-moving markets.
You buy EUR/USD at 1.1050 and set a stop loss at 1.1020. If the price falls to 1.1020, your position is automatically closed, limiting your loss to 30 pips. Without a stop loss, the position would remain open and losses could grow indefinitely.
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