RISK MANAGEMENT
What Is a Stop-Loss Order in Trading?
A stop-loss is an order you place on your broker’s platform (Forex/CFD/equities) to sell/close a position once price reaches a specified level. It is designed to limit losses when a trade moves against you—especially useful when you can’t watch the market continuously. This guide explains why stops are necessary, how to set them, and example stop strategies traders can use.
Risk Control
Trade Execution
Department
OTM Academy
Category
Trading Basics
Why a Stop-Loss Matters
At its core, a stop-loss is an order on your trading platform to exit when price hits a defined loss threshold. It’s built to mitigate losses when the market doesn’t move in your intended direction. Although many traders associate stops with long (buy) trades, they apply equally to short positions.
A stop helps remove emotion from decisions—vital when you can’t monitor every tick. No one can predict the future of FX or any market with 100% accuracy: even strong setups can be invalidated by new information. Every position carries risk, and poor money management can wipe out gains even if your win rate is high. That’s why knowing how to calculate and place stops is essential.
How to Set a Fixed Stop-Loss
With a fixed stop, you pre-define the distance and do not move it until price hits stop or target. Many traders start with a minimum risk-to-reward of 1:1—risk $1 to aim for $1.
Example: A trader in Los Angeles opens positions during Asia expecting volatility to expand in the EU/US sessions. They choose a 50-pip stop to give the trade room while capping risk. For 1:2 R:R, the stop stays 50 pips and the take-profit is 100 pips.
Fixed stops can also be indicator-based. A common approach is the ATR (Average True Range) to size stops by current volatility. In quiet markets, 50 pips may be wide; in volatile markets, it may be tight. Using ATR, pivots, or volatility stats aligns stops with live market conditions.
Advantages and Drawbacks of Stop-Loss Orders
Pros
Usually free to place.
Helps control losses and enforce money management.
Easy to use—no need to sit at charts all day.
Reduces emotional decision-making.
ConsMay be triggered by short-term spikes/volatility.
Some brokers restrict minimum distances or usage on certain symbols.
With non-guaranteed stops, gaps can cause fills at the next available price, potentially increasing loss.
Practical Examples & Key Factors
DAX30 Example — Buy
Entry = 12900, Stop distance = 10 pts, Stop level = 12890 (for buys, SL is below entry).
DAX30 Example — Sell
Entry = 12900, Stop distance = 10 pts, Stop level = 12910 (for sells, SL is above entry).
What Is a Trailing Stop-Loss?
A trailing stop is a dynamic risk tool that moves with price to protect open profit: it follows rises in long trades and follows declines in shorts, and freezes when price moves against you. If price then reverses to the trailing level, the trade closes and locks in gains. It’s powerful when you can’t monitor constantly, but it only updates while the platform is active (e.g., MetaTrader must be running).
How it works
Long trade: trail increases as price rises; if price falls to the trail, the position closes.
Short trade: trail decreases as price falls; if price rallies to the trail, the position closes.
Pros: locks profits, automates adjustments, can make day trades more profitable.
Cons: may close too early, stops updating if the platform is off, tricky on very volatile assets.
Difference vs Classic Stop: classic stop is static at your chosen level; trailing moves with price as long as it’s in your favor (and should never sit below your classic SL when both are used).
Execution, Gaps, Guaranteed Stops & Strategies
A GSL is like insurance against extreme moves/gaps. Notes:
Often must be placed a minimum distance from current price (e.g., ~5% or broker-defined).
Broker-discretion and time restrictions may apply.
Not all brokers offer GSL, and it can be more expensive than standard stops.
Who may benefit: traders seeking extra protection in uncertain periods, high-leverage users, or those who want a safety net for worst-case events.
Applying Stop Strategies
Set & Forget: place SL and leave it. Reduces early exits and emotion; risk remains fixed from start to finish.
50% Risk-Reduction Rule: after price confirms in your favor (e.g., next day close above entry on a bullish Pin Bar), slide SL to reduce risk by ~50% using structure (prior day low/high). Helps the trade “breathe” while cutting exposure.
Inside Bar / Pin Bar stops:
Pin Bar: SL beyond the tail (invalidates setup if hit).
Inside Bar: SL beyond the mother bar’s high/low (more conservative) or beyond the inside bar (tighter).
ATR-Based Trailing: use ATR multiples so the trail adapts to volatility (wider in high vol, tighter in low vol).
Style-Specific Guidance
Scalping/News: always account for short-term spikes and calendar events; stops must reflect intraday volatility.
Day Trading: if you can’t monitor positions at all times, stops are essential.
Swing Trading: place stops farther from noise, pre-define maximum loss, and align with trend structure (key swing highs/lows, support/resistance).
Bottom Line on Stop-Loss
Successful traders treat risk management as non-negotiable. Stops help prevent a single position from ruining your track record. Use the method that matches your strategy, timeframe, and volatility, keep MetaTrader active if you trail, and continually refine placements with market structure + indicators (e.g., ATR).
