Stop-loss in trading

A stop-loss order is a market order that helps manage risk by closing your position once the instrument​​/asset reaches a certain price. A stop-loss aims to cap an investor’s losses on a position. If you set a stop-loss order for 10% below the buy price, it will limit your losses to 10%.

A stop-loss aims to cap your losses by closing you out of the trade once your pre-determined figure has been reached. The stop-loss order you’ve set will stay in effect either until it’s triggered, cancelled or your position is liquidated. If the instrument’s price falls below your threshold, your stake in the instrument will be sold at the next available market price. By occurring automatically once your limit is reached, it provides an exit plan, preventing you from losing any further capital on that position.

The stop-loss level is determined by the trader, who might take into account fundamental analysis​​ factors like current underlying market conditions and the likelihood of slippage occurring. Slippage in trading​ is the difference between the expected price and the actual price the trade was executed at. This can occur at periods of high market volatility, such as major news releases and events​​​, when either entering or exiting the trade.

The stop-loss order lasts until either a) the stop-loss level is reached, b) the stop-loss is removed without closing the trade, or c) the trade is closed.

When deciding where to set a stop-loss, traders might account for fluctuation or volatility in the market. The historical movement of the asset and its financial market is also a good indication of where to set your stop-loss. If you’re intending to go long, the stop-loss should be placed below the market price, or it should be placed above the market price if going short.

Where to place your stop-loss can also depend on what type of trader you are. A longer-term investor may choose a higher percentage distance away, whereas an active trader may choose a smaller distance.

Stop-loss orders can be used for a wide range of trades, in volatile markets such as shares and forex trading. This is because there is more chance of slippage in a highly liquid market, and traders can take advantage of stop-loss limits. Traders can use risky short-term strategies, such as scalping, day trading and swing trading effectively by placing stop-loss orders at their desired points of exit. Learn more about trading strategies​​ in the video below that can be used in conjunction with stop-loss market orders.

When deciding where to place your stop-loss, it’s important to consider how much you’re willing to lose. Consequently, a stop-loss should be placed far enough away so that it won’t be triggered too early, but not so far away that there is a risk of losing significant capital. A trading plan should be developed so you can enter and exit strategically.

You can set stop-loss orders on all of your positions with our award-winning trading platform​​, Next Generation. We offer endless drawing tools, price projection tools, technical indicators, stop-loss, take profit and other market orders.

When trading the financial markets with us, you can speculate on the price movements of the underlying asset through spread betting or CFD trading (contracts for difference). Spread betting is our most popular product and allows you to trade tax-free* in the UK. Here is an example of how to use a spread betting stop loss on an existing position.

Let’s say you open a trade of £1 per point at a ‘buy’ price of 7310, placing a stop-loss at 7300. If the price falls to 7300, the stop-loss will be triggered and your trade would be closed at the next available price.

However, even if the price were to reach 7350, it could potentially fall to 7300 and trigger your stop-loss. One way to guard against such a scenario is to implement a trailing stop-loss order.

Stop-loss orders are essential to your trading strategy. Some of the benefits of implementing a stop-loss to your trades are: