What is a Stop Loss?
Stop order to close a deal. Trigger condition for FX/Indices: current bid (for BUY deals) or current ask (for SELL deals) reaches the Stop Loss level. Trigger condition for Stocks: the last price reaches the Stop Loss level. The Requested Order price is not guaranteed.
How does a Stop Loss work?
1. Setting the Stop Loss: When entering a trade, a trader sets a Stop Loss order at a specific price level. This price is typically set below the entry price for a long position or above the entry price for a short position.
2. Triggering the order: If the market price of the security reaches the Stop Loss level, the Stop Loss order is triggered and the position is closed at the best available price. This action is automatic and does not require the trader to be actively monitoring the market.
Benefits of using a Stop Loss
1. Risk management: A Stop Loss helps in managing risk by limiting the amount a trader can lose on a single trade.
2. Emotional discipline: It removes emotions from trading decisions, ensuring that trades are exited when they are no longer profitable according to the pre-set criteria.
Example of a Stop Loss in action
Long position: If a trader buys a stock at $100 and sets a Stop Loss at $95, the Stop Loss order will be triggered if the stock price drops to $95. This limits the trader's loss to $5 per share.
Short position: If a trader shorts a stock at $100 and sets a Stop Loss at $105, the Stop Loss order will be triggered if the stock price rises to $105. This limits the trader's loss to $5 per share.
