Risk warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 66% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Risk warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 66% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

What is Stop Loss? Trading Basics

Forex Educational Video Series

Author: Andreas Thalassinos (BSc, MSc, MSTA, CFTe, MFTA), Head of Education at FXTM.

What is Stop Loss Order in Forex trading?

Apart from Take Profit, an equally important pre-calculated price level used by traders today is called Stop Loss. As the name suggests, this is a type of pending order that allows the trader to set a predefined level on the price chart that closes a losing position. In other words, it ensures a minimum loss as it closes the position. Stop Loss is abbreviated as (S/L). For example, a trader goes long (in other words, enters a buy position) by entering the market at 1.2980, expecting prices to rally higher. He knows that the market is unpredictable, however, and that it may go in the opposite direction than his expectation. So he calculates the risk before entering the market, and places a Stop Loss order below the entry price. If the Bid price hits the predefined Stop Loss price at 1.2880, the position is closed and a minimum loss is ensured.

Similarly, if a trader enters a sell (short) position, expecting prices to fall, he would place a protective Stop Loss order at a higher level than the entry price in case prices spike up. If the Ask price hits the predefined Stop Loss price, the position is closed and minimum loss is ensured.

Stop Loss has been designed to protect your capital by ensuring a minimum loss; it is a level set by the trader in advance according to how much he or she is willing to risk and/or lose. It’s important to remember that Stop Loss and/or Take Profit orders may be placed on Instant Execution accounts simultaneously when entering the market. On Market Execution accounts, you can specify a Stop Loss or Take Profit order when placing a pending order to enter the market.

Stop Loss and Take Profit are both crucial elements of Risk Management – something that will be covered in a future video.

Disclaimer: This written/visual material is comprised of personal opinions and ideas. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same.

Risk Warning: There is a high level of risk involved with trading leveraged products such as forex and CFDs. You should not risk more than you can afford to lose, it is possible that you may lose more than your initial investment. You should not trade unless you fully understand the true extent of your exposure to the risk of loss. When trading, you must always take into consideration your level of experience. If the risks involved seem unclear to you, please seek independent financial advice.

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