What is a stop-loss

What is a stop-loss?

A stop-loss is a trading instruction that automatically closes a position once the price reaches a preset level. The idea is simple: you determine in advance at which point a loss becomes too large for your comfort. When that price is hit, the platform executes the order so you do not need to be watching the market every second.

Stop-loss orders are used in CFD trading, shares, forex and many other markets. They help traders manage downside risk in a structured way and avoid emotional decision-making in fast markets. Instead of reacting to a sudden movement, the trader sets a threshold and lets the system act when conditions are met.

Why traders use stop-loss orders

Markets move quickly. Even experienced traders cannot monitor price movements at all times. A stop-loss creates a predefined exit point. For new traders, this can create discipline. For experienced traders, it enables systematic risk control across multiple positions without constant manual oversight.

Imagine a position on a stock index that suddenly reacts to breaking news. With a stop-loss in place, the system takes care of the exit automatically, rather than leaving the decision to a moment of stress or uncertainty.

Different types of stop-loss orders

Standard stop-loss
A standard stop-loss triggers a market order once the chosen price level is reached. The position closes at the best available price at that moment. In normal market conditions, this usually means a price close to the trigger level. In highly volatile markets, slippage may occur, meaning the execution price may differ from the stop price.

This type is straightforward, making it a common choice for many traders.

Stop-limit order
A stop-limit order also activates at a chosen level, but instead of placing a market order, it places a limit order. That means the trade will only close at the stop price or better. The benefit is price control. The risk is that in fast markets the limit order may not fill, leaving the position open even though the stop level has been reached.

Experienced traders sometimes choose this when precise execution matters more than guaranteed exit.

Trailing stop-loss
A trailing stop moves automatically with the market when the trade is in profit. For example, if a position rises, the stop level rises with it by a set distance. If the market reverses, the stop stays fixed and can lock in gains if price moves back down.

This technique is often used by traders who want to follow price momentum without manually adjusting stops. It adapts to market movement but still offers a backstop if momentum fades.

Pros of using stop-loss orders

Stop-losses bring structure to trading. They enforce exits based on price levels rather than emotion or hesitation. They can reduce the impact of sudden market swings and allow traders to step away from screens. They also help define the maximum downside on a trade before entering it, which creates clarity.

For systematic and professional traders, stop-losses are part of well-defined trading plans, allowing consistent execution and portfolio management.

Cons and limitations

A stop-loss is not a guarantee of perfect outcomes. In fast or thin markets the execution price can differ from the stop level. Prices may temporarily spike or dip before moving back, causing exits that in hindsight look premature. Traders sometimes place stops too close to market noise, leading to frequent unintended triggers.

With stop-limit orders, the main risk is not being filled at all if price gaps past the limit level. And while trailing stops can secure gains, they may also trigger during normal pullbacks in trending markets.

In practice

Stop-losses are a tool. Their effectiveness depends on placement, market conditions and the trader’s strategy. Beginning traders often learn discipline through them. Advanced traders use them as part of risk systems that balance many positions at once. In both cases, the principle remains the same: define exit parameters before the trade, not during moments of pressure.

Understanding the differences between stop-loss types and how markets behave around key levels helps traders choose the approach that suits their style and objectives.

Disclaimer:
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You can lose your entire investment. Only trade with funds you can afford to lose and make sure you fully understand how CFDs work.