Stop Loss
Definition
A stop loss is an order that automatically closes a trade if the market moves against you to a specified price. Its purpose is to limit losses and control risk, but it does not guarantee the exact exit price. How reliably a stop loss works depends heavily on market conditions and the broker’s execution policies.
In Plain English
In plain terms, a stop loss is a safety instruction attached to a trade. You tell the broker: ‘If the price reaches this level, close my position.’ This helps prevent small losses from turning into much larger ones, but the final result can still vary depending on volatility, liquidity, and how the broker executes orders.
How It Works
- You open a trade and set a stop-loss price below (for buys) or above (for sells) your entry.
- The stop loss sits in the system and monitors the market price.
- If the market reaches the stop level, the stop loss is triggered.
- Once triggered, it becomes a market order to close the position.
- The trade is closed at the next available price, which may differ from the stop level.
- In fast or illiquid markets, the execution price can be worse than expected due to slippage.
- Some brokers offer variations such as trailing stops or guaranteed stop losses, each with different cost and risk implications.
Why This Matters for Traders
Stop losses are a core risk-management tool. They help traders define risk before entering a trade and avoid emotional decision-making during adverse moves. However, stop losses are not a substitute for proper position sizing or understanding market behaviour. Their effectiveness depends on how they interact with spreads, volatility, and broker execution quality.
Common Misunderstandings
- A stop loss guarantees your maximum loss: standard stop losses do not guarantee the exit price.
- Stops always protect against extreme moves: price gaps can bypass stop levels.
- Tight stops reduce risk without trade-offs: very tight stops increase the chance of being stopped out by normal price noise.
- All stop losses behave the same across brokers: execution quality and rules differ.
- Stops remove the need to monitor trades: market conditions can still change outcomes significantly.
How This Affects Broker Choice
Stop-loss handling is a meaningful differentiator between brokers. When comparing platforms, users should consider:
• Execution speed and slippage statistics.
• How stop losses are triggered (bid vs ask price).
• Whether guaranteed stop losses are offered, and at what cost.
• How often spreads widen and how that affects stop placement.
• Transparency in trade history showing requested vs executed prices.
From a monetisation and comparison perspective, stop-loss behaviour often reveals execution quality. This content naturally supports links to broker reviews and comparison pages where order execution, slippage, and stop handling are assessed side by side.
Risks & Common Mistakes
• Placing stops too close to the entry price without accounting for normal volatility.
• Ignoring spread widening, which can trigger stops earlier than expected.
• Assuming stop losses protect against all market gaps and news events.
• Using stops without adjusting position size, leading to larger-than-expected losses.
• Choosing brokers with poor execution transparency or inconsistent stop handling.
Risk note: during fast-moving or gapping markets, stop losses may execute at significantly worse prices than expected, increasing realised losses.
Real-World Example
You buy a CFD at £50 and place a stop loss at £48 to limit risk.
• Under normal conditions, if the price falls to £48, the stop triggers and closes the trade near that level.
• During a volatile market open, the price gaps from £49 to £47.
In this case, the stop loss is triggered but executed around £47, resulting in a larger loss than planned. This outcome reflects market conditions and execution, not a malfunction of the stop itself.
What to Check Before Trading
- Does the broker trigger stops on bid, ask, or last traded price?
- How does the broker disclose slippage and execution quality?
- Are guaranteed stop losses available, and what extra cost applies?
- How often do spreads widen on the instruments you trade?
- Is stop-loss behaviour clearly visible in trade confirmations and history?
- Does the broker operate under a regulatory framework with execution standards?
- Are order types and limitations clearly documented?
Related Concepts
Slippage explains why a stop loss may execute at a worse price than requested.
Trailing stops adjust automatically with favourable price movement, changing how risk is managed.
Spread widening can trigger stop losses earlier than expected.
These offer price certainty but usually come with additional costs and restrictions.
Proper position sizing determines how much capital is at risk when a stop loss is hit.
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Risk Warning: This website does not provide financial, investment, or trading advice. All information is for educational purposes only. Trading and investing involve substantial risk of loss. You should carefully consider your financial situation and consult with qualified professionals before making any financial decisions.