What is a Stop Loss order?
A stop loss is a type of closing order, allowing the trader to specify a specific level in the market where if prices were to hit, the trade would be closed out by our systems automatically, typically for a loss. This is where the name Stop Loss originates from, because the order effectively stops your losses.
How does a Stop Loss order work in practice? Let’s analyze the below example. The trader has opened a long position on EURUSD in expectation that it will increase in value above 1.09935, which is shown by the first line. You’ll notice a second line below that, which is a Stop Loss set at 1.09842. This means that if the market falls beneath this level, the trader’s position will be automatically closed at a loss – and therefore the trader is protected from any additional price moves lower. A Stop Loss helps to manage your risk and keep your losses to an acceptable and controlled minimum amount.
Do stop losses provide complete protection?: Whilst stop loss orders are one of the best ways to ensure your risk is managed and potential losses are kept to acceptable levels, they don’t provide 100% security. Stop losses are free to use and they protect your account against adverse market moves, but please be aware that they cannot guarantee your position every time. If the market becomes suddenly volatile and gaps beyond your stop level (jumps from one price to the next without trading at the levels in between), it’s possible your position could be closed at a worse level than requested. This is known as price slippage
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