What Is a Stop Loss in Trading? Definition, Types, and Examples

Definition:
A Stop Loss (SL) is a predefined order placed with a broker to automatically close a trade once the market reaches a certain price level, limiting potential losses.

Explanation:
Stop losses are a cornerstone of risk management. They ensure traders don’t risk more than they can afford to lose, preventing emotional decisions during high volatility.

• In a Buy (Long) Position, the stop loss is set below the entry price.
• In a Sell (Short) Position, the stop loss is set above the entry price.

By doing this, a trader defines their maximum acceptable loss before entering a trade.

📊 Types of Stop Loss

1. Fixed (Standard) Stop Loss:
   • Set at a specific price level (e.g., 50 pips below entry).
2. Trailing Stop Loss:
   • Moves automatically as the market moves in your favor, locking in profit while limiting loss.
3. Volatility-Based Stop Loss:
   • Adjusted according to market volatility (e.g., using ATR indicator).
4. Time-Based Stop Loss:
   • Trade is closed after a certain time if the price hasn’t moved as expected.

📈 Example (Forex)

• Trader buys EUR/USD at 1.1000.
• Sets a stop loss at 1.0950 (50 pips below entry).
• If the market falls to 1.0950, the trade closes automatically with a 50-pip loss.
• If price rises, the stop remains as a protection.

🌍 Why Stop Loss Matters

• Prevents catastrophic losses
• Adds discipline to trading
• Removes emotional decision-making
• Essential for long-term account survival

Related Terms: Take Profit, Risk Management, Position Size, Trailing Stop, Volatility

Category:
Trading / Risk & Order Management

✅ FastPip Tip:

Always set a stop loss before entering a trade. Even the best setups can fail, but with an SL you ensure one trade won’t destroy your account.

📣 Related Resources from FastPip

✅ Follow traders who use disciplined SL management on our Copy Trading Platform
✅ Get Forex Signals with clear stop loss levels
✅ Read guides on our Blog about stop-loss placement strategies

✅ Risk Management in Forex: Position Sizing & Capital Protection