What is a Stop Loss Order and How it works

Do you want to know more about forex orders and how they work? Watch our latest video to find out what is a stop-loss order and how to effectively use it in your everyday trading.

What is a Stop Loss Order A simple but effective guide

Without a doubt, the most important thing that you will be using as a traitor is a stop loss. Simply put, a stop loss is in order that you put into your broker to close a position once it hits a certain price. This is one of the most important ways to protect your trading capital, as there can be sudden moves overnight that work against the value of your position. After all, we are operating in 24-hour markets now, and with that being the case things can happen rather rapidly while you are not aware of them. By placing a stop loss, you are protecting yourself from extraordinarily large losses.

When placing your stop loss, you give your broker the right to close out a position at the best available price once that level gets hit. For example, if you see a level of support in a market that you are buying, and you recognize that if the support gets broken to the downside things could get rather ugly, that might be an excellent place to place your stop loss. This is because obviously being on the long side of the position has now become the wrong side of the position.

Looking at the GBP/CAD chart, you can see that the British pound fell rapidly against the Canadian dollar. This was due to the UK vote on whether or not to stay within the European Union. Obviously, the British chose to leave, and that works against the British pound. The losses that you would have incurred overnight had you not placed a stop loss would’ve been horrific, and probably would’ve led to what is known as a margin call, when you don’t have enough money to keep the position alive. Stop loss orders should always be used when trading financial instruments.