Stop Loss

Stop-Loss

What is Stop Loss

Stop Loss is a kind of limitation that helps traders not to lose too much money. It is a crucial element in trading. It helps to control the amount of loss that a trader can face. As soon as the level goes too low, it automatically closes the trade.

If the trader is making a selling trade, Stop Loss should be above the entry level. And vice versa: if the trader is making a buying trade, Stop Loss should be below the entry level.

To set Stop Loss in MetaTrader 4 and 5, you need to click “New Order” and then in the popup set the necessary Stop Loss.

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Example of Stop Loss

Let’s imagine a trader named Festus. He wants to sell XBRUSD when the level is around $117 before the weekends (as we know, there’s no trading at the weekends) with the target at $112. He is not sure whether the price goes up or down, and of course, Festus wants the profit. He wants to make sure that he won’t miss the fluctuations when the trading begins and won’t lose too much before he checks his MetaTrader. Therefore, he uses Stop Loss at $118 to limit potential losses. If the trade is successful, Festus will get a nice profit; in the bad case, for instance, if XBR rises to $128, he will lose only the amount limited by the Stop Loss and not more. For instant, if his position volume is 0.01, losses will be limited by $10. The avoided loss will be $100. The potential profit in the good case will be $50.

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Pros and cons of Stop Loss

There are several benefits of using a Stop Loss. Firstly, you don't have to monitor your trade every second; the system automatically closes the trade when the price reaches the Stop Loss level. Secondly, it usually costs nothing to implement. And finally, Stop Loss also helps isolate decision making from emotional influences. Traders may maintain the false belief that if they give the stock/currency pair another chance, it will come back, but, in reality, this delay can only lead to increased losses. In addition, Stop Loss gives the feeling of security that the trader can’t lose too much.

The downside is that short-term price fluctuations can trigger a Stop Loss prematurely. It’s a common situation when the price fluctuates only for a minute and after that goes in the direction of a trade. However, during the fluctuation the price may trigger a Stop Loss if it’s too small, i.e. too close to the entry level. If a trade is closed automatically, a trader loses the potential profit. That’s why it’s a key skill of a trader to find a good place for a Stop Loss. The Stop Loss shouldn’t be too extreme, because it won’t make any sense, and it shouldn’t be too small, because the trade can be closed in the wrong moment after a tiny fluctuation.

Remember your trading strategy

Knowing how to use Stop Loss productively can be an important skill. It’s the part of your own trading strategy. Try using Stop Loss orders in FBS Demo Account.  After regular trading and building your trading strategy, it becomes more understandable what kind of Stop Loss is suitable for you.

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2022-05-27 • Updated

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