Lesson 4. What Is Stop Loss?
Stop-Loss is a pending order used by traders to minimize risks.
When analyzing the market, traders may misinterpret the asset price movement and incur losses. To mitigate the amount of potential loss, a trader can set certain risk limits based upon the market situation.
This saves you having to monitor charts for extended periods of time and can remove the emotional element when making key trading decisions. A Stop-Loss order also allows you to leave your screen to go and watch a movie with the knowledge your risk amount is capped.
Here is an example of how to place a Stop-Loss order:
- You open a EUR/USD buy trade at 1.0605
- You invest $500 with a multiplier of 100
- To place a Stop-Loss order correctly, check the chart for the asset’s price most recent decline. Find the minimal price.
- Your Stop-Loss order should be placed just below the minimal price, at approximately 1.0580
- To place a Stop-Loss order for this quote, first open a trade with the asset and then go to My Trades
- Select the EUR/USD trade you have just opened and click on it
- Select Quote from the Stop Loss/ Take Profit menu
- In the Stop Loss field, set your desired value, 1.0580 in our case, and click on Save
Now you don’t have to worry about the asset’s price changes nor will you have to spend hours monitoring your charts. Your risks have been calculated and taken care of.
For more successful trades, the Stop-Loss order is often used together with the Take Profit order, available in the next lesson.