What is a stop loss
A stop loss is an order attached to an open position. It closes the position automatically if the price moves against you to a level you chose in advance. Its purpose is to limit the loss on a trade to an amount you decided on before entering.
Without a stop loss, a losing position stays open until you close it yourself, or until the broker closes it at stop out when your margin runs low. That point can be far beyond what you meant to risk.
A stop loss does not make a trade safe. Leveraged forex and CFD trading can lose money fast, and a stop can be filled at a worse price than the one you set. That risk is covered below.
How a stop loss works in forex
A stop loss is a type of stop order. When the price reaches your level, it becomes a market order and closes the position at the next available price.
Which price triggers it depends on the direction of the trade. In MetaTrader this works as follows:
| Position | Where the stop sits | Price that triggers it |
|---|---|---|
| Buy (long) | Below the entry | Bid price |
| Sell (short) | Above the entry | Ask price |
A buy position closes at the bid, so the bid triggers its stop. A sell position closes at the ask, so the ask triggers its stop. Charts usually show the bid only. This means a sell stop can trigger when the spread widens, even if the bid line on the chart never touched your level. See bid and ask and what is spread.
The distance between entry and stop is measured in pips. A pip is a standard unit of price movement for a currency pair (what is a pip). Your money loss at the stop equals the stop distance in pips × pip value × lot size, plus costs such as spread, commission and swap.
Types of stop loss
Price-based stop
The stop goes at a level on the chart where your trade idea is proven wrong. Examples are just beyond a recent swing low for a buy, or beyond a support or resistance zone. The market sets the stop distance, and you then adjust the lot size so the money at risk fits your plan.
This is the most common approach among experienced traders, because the stop has a reason to be where it is.
Money-based stop
You decide the amount you accept to lose, then place the stop at whatever distance that amount allows with your chosen lot size. It is simple, but the stop can end up at a random point on the chart: too close, where normal price movement hits it, or too far.
A better way is to fix the money amount and the chart level, and let the lot size be the variable. The lot calculator below does exactly that.
Volatility-based stop
The stop distance is a multiple of recent price movement, often measured with the Average True Range (ATR) indicator. In calm markets the stop is tighter; in active markets it is wider. This keeps the stop outside the usual noise for current conditions. See volatility.
A wider stop means a smaller lot for the same money risk.
How to set a stop loss
- Choose the stop level before you enter: a chart level, an ATR multiple, or both.
- Measure the distance from entry to stop in pips.
- Decide the share of your balance you accept to lose on this trade.
- Calculate the lot size from these inputs.
- Enter the order with the stop attached, and check that the stop appears on the position.
Use the lot calculator for step four. Enter your account balance, risk per trade as a percentage or amount, the stop distance in pips, and the instrument. It returns the position size that keeps the loss at the stop within your limit.
Fill in the empty fields to see the result.
Rounded down to 0.01 lot so the risk never exceeds your limit.
To see the result in money and pips if the stop is hit, enter the instrument, direction, lot size, entry price and stop price into the profit calculator. The output is the loss before slippage. Add spread and commission to see the full cost (total cost of a trade).
Fill in the empty fields to see the result.
More tools are on the calculators page.
Ready to try it on a real or demo account?
Partner link · trading carries a high risk of loss
Slippage and gaps: when a stop fills worse
A stop loss guarantees that the position will be closed. It does not guarantee the price.
- Slippage is the difference between your stop price and the actual fill. It happens in fast markets, during news releases and when liquidity is thin. See slippage.
- Gaps happen when the market opens at a price far from the previous close, for example after a weekend. If the price opens beyond your stop, the stop fills at the first available price, which can be well past your level. See price gaps.
This is why your real loss can be larger than the figure from the profit calculator. Lower leverage and smaller size reduce the damage when this happens. Holding positions over weekends and major news increases the chance of it.
Why moving a stop further away is dangerous
When the price approaches the stop, many traders move it further away to "give the trade room". This has three effects:
- The loss you planned is replaced by a larger, unplanned one.
- The lot size was calculated for the original stop distance, so risk per trade is now above your limit.
- It often repeats, and a small loss turns into a margin call or stop out.
The reason you set the stop has not changed just because the price is near it. If your analysis changed, close the trade and reassess. Do not widen the risk. Tightening a stop to lock in a smaller loss or protect a gain is a different decision, and a trailing stop can do this automatically. For the emotional side, see trading psychology.
Stop loss, take profit and risk management
A stop loss defines the downside. A take profit defines a target where the position closes in profit. Comparing the stop distance with the target distance gives your reward-to-risk ratio. Combined with how often your trades reach target, this shows whether a method can hold up over many trades.
None of this removes risk. It makes risk measurable. Practise placing stops on a demo account first (first demo trade) and read the wider risk management guide.
Frequent questions
What is stop loss in simple words?
It is an automatic exit you set in advance that closes a losing trade at a chosen price, so the loss stays near an amount you decided before entering.
Does a stop loss guarantee my maximum loss?
No. In fast markets or after gaps, the stop can be filled at a worse price than you set. The loss can be larger than planned.
Why did my sell stop trigger when the chart never reached it?
Sell positions close at the ask, while most charts show the bid. If the spread widened, the ask could reach your stop while the bid did not.
Should I place my stop at a round money amount?
It is better to place the stop at a chart or volatility level, then size the position with the lot calculator so the money at risk fits your limit.
Can I trade without a stop loss?
You can, but the loss is then limited only by your own decision or by stop out. Leveraged positions can lose money fast, so trading without a planned exit exposes you to large losses.
Is it fine to move my stop loss?
Moving it closer to reduce risk or protect a gain is a normal technique. Moving it further away increases your risk beyond the plan and is a common cause of large losses.