Glossary
Stop loss
A stop loss is an order that closes a trade automatically if price reaches a set level, to cap the loss.
What it means
The trader sets the level when opening the trade or afterwards. When price reaches it, the stop becomes a market order and closes the position. In fast markets or across a price gap, it can fill at a worse price than the level set, which is slippage. A trailing stop moves with the trade as it goes into profit.
Some prop firms require a stop loss on every trade, sometimes within a set time of opening it. Even where it is not required, a stop is the main way to keep one trade inside the daily loss limit. Traders size positions from the stop distance and should leave room for spread and slippage between the stop and the limit.
Worked example
Illustrative numbers: a trader on a $100,000 account with a $5,000 daily loss limit plans to risk $1,000 on a trade. They buy EUR/USD at 1.1000 with a stop at 1.0975, 25 pips away, and trade 4 lots, so each pip is worth $40. If the stop is hit, the loss is about $1,000.
Free tools that use this
- Lot size calculatorThis calculator gives the position size that loses your chosen risk, and no more, if your stop is hit. In words: lot size equals the amount you...
- Risk to reward calculatorThis calculator turns what a trade risks and what it aims to make into a risk to reward ratio, and shows the win rate you need to break even. In...
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