What Is a Stop Loss?

A stop-loss is an instruction designed to close a trade when price reaches a predetermined level.

Its primary purpose is to control downside risk.

Example

You buy GBP/USD at 1.3000.

You decide that if price reaches 1.2950, your trade idea is no longer valid.

You place your stop-loss around 1.2950.

If the market reaches the relevant level, the position can be closed according to the order’s execution conditions.

Why Are Stop Losses Important?

Without a predefined exit, traders can easily fall into:

“I’ll just give it a little more room.”

Then:

“I’ll wait until it comes back.”

Then:

“I can’t take the loss now.”

This can turn a manageable loss into a much larger one.

Important

A stop-loss does not guarantee a specific maximum loss in all circumstances.

During extreme volatility or gaps, execution can occur at a worse price.

Key Takeaways

• Stop-losses help control downside.
• They should be planned before entering.
• Never move a stop simply because you don’t want to accept a loss.