A stop-loss is an automatic order placed with your broker when opening a position. It triggers immediate closure if price hits a preset level, capping the maximum possible loss.
It's the single most important risk management tool in trading. Without a stop-loss, a losing position can wipe out an entire account in minutes during a violent move (economic announcement, opening gap, flash crash).
Stop-loss types:
- Hard stop: limit order executed at market price upon trigger (can suffer slippage during gaps)
- Trailing stop: follows price at a fixed distance or %, locks in profits as the trade moves in your favor
- Guaranteed stop: triggered at the exact price even during gaps (offered by some brokers for a premium)
Where to place the stop? Not at an arbitrary level (-50 pips, -100 pips), but at a technical level invalidating your scenario: below a key support for a long, above a resistance for a short, or 1.5× ATR (Average True Range) to adapt to volatility.
Golden rule: position size is calculated after choosing the stop-loss, never the reverse. You decide the stop distance first, then size the lot so that maximum loss = 1-2% of your capital.