A stop loss is the amount at which a trade that is losing profit will automatically close at. It protects a trader from losing control of their account in the event that a trade runs away from them — and, combined with a take profit, it creates far more consistent performance and results for the trader.
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Here is all the information that you need about how a SL works and why it’s essential…
How Does a SL Work?
A stop loss is exactly what it sounds like: it stops a trade after the trade has experienced a certain amount of loss.
A trader can initiate a trade with a SL set up, which will indicate the price at which the trade should automatically close and take any losses. You can also update any current or pending trades to add a stop loss.
A SL is often incorporated into different trading strategies; it may be set at a certain support or resistance point, at a certain amount of pips away from the current trading price, or at a percentage of volatility. All of these are viable as long as they remain a consistent part of the trading strategy.
A SL can be seen as the opposite of a take profit, which takes the trade’s profit once it reaches a certain price. Together and a take profit set the outer boundaries of a trade; a trader knows with a stop loss and take profit that the forex order is either going to close low at the set stop loss price, or the set take profit high price. There are no other alternatives. This creates consistency and stability; each time a trader embarks upon a new trade, they know they are either going to lose a specific amount or gain a specific amount.