The stop loss is probably the most commonly used order type in Forex trading. Traders can use the stop loss before opening a position to specify the maximum loss to which a position should remain open. If the price breaks through the specified mark, the position is automatically closed by the stop loss.

Advantages of stop-loss orders

The advantages of stop-loss orders are many. On the one hand, it allows for accurate and consistent money management in trading, where the maximum possible loss for a position can be set from the beginning. On the other hand, profits from positions that are already in the plus can be hedged without having to constantly sit at the computer and continue to observe the market.
 
With the help of take profit orders, which work like reverse stop loss orders, it is also possible to automatically secure profits at predefined price targets in this way.

Example of a Stop Loss

In the following example, a long position was opened in the DAX30. The expectation for this trade is that the price will retarget the upper range of the trading range around 9980 points. However, in the event that the price develops differently and leaves the trading range downwards, we have placed a stop-loss order at 9943 points. If the price breaks through this range, our trading setup for this trade is invalid anyway and the stop-loss automatically closes our position, thus protecting us from possibly even greater losses.

Another advantage is that you do not have to constantly monitor the markets, because once the order is in the market, it will be executed automatically as soon as the market reaches the set price.
 
With most Forex brokers, you can set a stop-loss both before opening the order and afterwards. In this case, some brokers like exness metatrader 4 prescribe a minimum distance of, for example, 5 pips from the current price. Also, the price at which the order is closed when the stop-loss level is reached depends on the broker. With ECN or STP brokers, the orders are executed at the price that is available at the moment the order is received by the broker. If you want to have a definite execution at the desired price, you have to look for a broker such as IG Markets, which offers its clients guaranteed stop loss orders in addition to normal stops.

How to set a stop loss order ?

Almost all brokers offer their customers the possibility to set stop loss orders in the order mask. in MetaTrader 4, for example, the input field for the stop loss orders looks like this:

Here you can simply copy the current price for quick editing and then simply click to adjust XY pips up or down until the desired price at which the position should be closed by stop loss is reached.

Where to set the stop loss

This question depends on many factors such as trading style, trading strategy, position size, etc. and can therefore unfortunately not be answered in a general way.  If you set the stop loss too tight, you may be stopped out, only for the price to continue the expected rise / decline afterwards. If you set the stop loss too wide, you may give away already generated profits again or even risk larger losses. If you want to know more about the correct setting of stop-loss distances, we recommend our tips for the correct setting of stop-loss and limit orders in trading.