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Stop loss definition
A stop loss is an order that closes an open position once the market reaches a price you set in advance. It caps the largest loss you are willing to take on a trade.
You can attach a stop loss in forex, stocks, commodities, indices, futures, options, and CFD trading. On a long position you place it below the entry price; on a short position you place it above. When price touches the level, the order triggers and the position closes.
A stop loss caps the downside; a take profit closes the trade once it reaches a chosen gain. The two are mirror orders, with the stop loss sitting on the losing side of your entry and the take profit on the winning side. A stop loss does not guarantee the exact price in fast or gapping markets, so the fill can land past the level through slippage.
Stop loss Example
You buy EUR/USD at 1.0850.
You set a stop loss at 1.0800 to cap the downside:
1.0850 - 1.0800 = 0.0050, or 50 pips
If EUR/USD falls to 1.0800, the stop loss triggers and the position closes for a planned 50-pip loss, before spread, slippage, or costs.
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