What is a Stop Loss in Trading?

A stop-loss is an instruction placed with the broker to automatically close the trade at a pre-determined price. Usually, this price is less favourable to the trader. For example, 

• A trader buys EUR/USD at 1.1000 and places a stop loss at 1.0950. 
• Now, if the market reaches the stop-loss price, the position will be closed/ squared-off automatically.

How to Set a Stop Loss in Trading?

To set it, most traders first decide how much of their capital they are willing to risk on one trade (say 1 to 2% of the total purchase value). Next, they may identify a logical price level, such as:

• Below a recent support level for a buy trade, or
• Above a recent resistance for a sell trade

Additionally, some traders may even use technical indicators, such as Candlestick charts, Relative Strength Index (RSI), or check moving averages to determine the stop price.

However, note that a stop loss may limit the loss on a trade, but it does not guarantee a specific exit price. During periods of low liquidity or large price movements, the trade may be executed at a price different from the stop level (known as “slippage”).

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