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What Is a Stop-Loss Order? Types, Examples and Placement
How stop-loss orders work, the main types, where to place them and the mistakes to avoid.
How stop-loss orders work, the main types, where to place them and the mistakes to avoid.
A stop-loss order is an instruction to close a trade automatically if price moves against you to a level you choose. It caps the loss on a single trade and is the most basic risk control in leveraged trading. Placing it well is a skill, and this guide covers how stops work, the main types, and how to decide where yours should go.
When you open a trade, you set a price at which the position should close if the market goes the wrong way. If you buy EUR/USD at 1.0800 with a stop at 1.0770, your trade closes automatically when the bid price reaches 1.0770, limiting the loss to about 30 pips plus costs.
For a sell trade the stop sits above your entry. If you sell gold at 2,400 with a stop at 2,412, the trade closes if the ask price rises to 2,412.
A fixed price level. Once triggered, it becomes a market order and fills at the next available price. In normal conditions that is at or very near your level.
A stop that moves in your favor as price moves, staying a set distance behind it. If you buy at 1.0800 with a 30-pip trailing stop and price rises to 1.0860, the stop moves up to 1.0830. If price then falls, the stop stays at 1.0830. Trailing stops help protect open profit in trending markets.
Moving your stop to your entry price after the trade has moved a certain distance in your favor. It removes the risk of loss on the trade, but it can also get you stopped out by normal pullbacks.
A stop-loss is not a guarantee of an exact price. In fast markets, such as around major economic releases, or when markets open after the weekend, price can jump past your level. Your order then fills at the next available price, which may be worse. This is called slippage. Reducing position size and being careful around high-impact news are the best defences.
Place your stop where your trade idea is proven wrong, not at an arbitrary number of pips. Common approaches:
A stop that is too tight gets hit by normal noise. A stop that is too wide forces a tiny position size or risks too much. The solution is to set the stop first, then size the trade around it.
Position size = amount at risk ÷ (stop distance × value per point or pip)
Example: a $3,000 account risking 1% ($30) on EUR/USD with a 30-pip stop. At about $10 per pip per standard lot: $30 ÷ (30 × $10) = 0.10 lots. If the stop is hit, you lose about $30.
If the stop needed to be 60 pips, the position would be 0.05 lots for the same $30 risk. TradeLocker's built-in risk calculator does this calculation when you set your stop; see the TradeLocker platform.
Pair every stop with a target. A trade with a 30-pip stop and a 60-pip target has a 1:2 risk-reward ratio. At 1:2 you can be wrong on more than half of your trades and still break even before costs. At 1:1 you need to win more than half.
A stop-loss defines your maximum loss before you enter, which is what lets you trade with leverage and survive losing streaks. Place it where your idea is invalidated, size your position from it, and leave it alone once the trade is live. For how leverage affects your margin and stop-outs, read how leverage and margin work in CFD trading, and for the bigger picture see forex vs CFD trading.
CFDs and forex are complex instruments and come with a high risk of losing money rapidly due to leverage. Read our risk disclosure.
