Experienced traders will testify that one of the keys to achieving success on financial markets over the long term is prudent risk management. Utilising a Stop Loss is one of the most popular ways for a trader to manage their risk, around the clock.
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.
Let’s take a look at the example above. 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 below this level, the trader’s position will be automatically closed at a loss - meaning that 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.
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.
Ask our account managers for more details or find out more about risk management in our Trading Academy.
This content has been created by XTB S.A. This service is provided by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, entered in the register of entrepreneurs of the National Court Register (Krajowy Rejestr Sądowy) conducted by District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register under KRS number 0000217580, REGON number 015803782 and Tax Identification Number (NIP) 527-24-43-955, with the fully paid up share capital in the amount of PLN 5.869.181,75. XTB S.A. conducts brokerage activities on the basis of the license granted by Polish Securities and Exchange Commission on 8th November 2005 No. DDM-M-4021-57-1/2005 and is supervised by Polish Supervision Authority.