What a stop loss actually is
Lesson 1 of 4 · about 7 minutes
3 questions, each checked the moment you answer it.
6 steps · about 7 minutes
The interactive lesson walks these ideas one screen at a time and checks your answers as you go. The text below covers the same ground for reading.
A stop loss closes the trade for you at a price you choose
It is an order you attach to a position, and you pick the price it sits at. Until the market reaches that price it does nothing. Its purpose is to end the trade at a price you chose, instead of leaving the loss to run for as long as the position is open. The drawing below is a short, sold at the lower line. A short makes money when price falls, so a rising price is what loses on this trade, and the stop goes above the price it was sold at. Price never reached the stop here, so the order never triggered and the position was still open at the end of the drawing.
When price reaches the stop, the order goes to the market
The price you picked is your stop-loss level. The order does nothing until the market trades at that level. At that moment it becomes a market order, and a market order generally fills at or near the price it was sent at. So the stop-loss level is the figure you asked for rather than one you are promised. Below, the short was sold on the bounce and the stop above it was reached four candles later.
A stop lets you decide the loss you are planning for before you open the trade
Without one, a position that keeps going the wrong way keeps costing until something else closes it. In course 1 that something else was the stop out: the platform closing positions on its own once the margin level fell to 50% in that example. A stop acts earlier, at a price you set, for an amount you worked out before you opened. The distance between the two lines below is that planned loss. Where the upper line belongs is the subject of "Where a stop belongs on a chart".