What is Stop-Loss Order?

What Does a Stop-Loss Order Mean?
It is basically an order placed with your broker to sell your currency pair that you are currently holding when it reaches a certain price. This certain price typically means a loss, as the name stop-loss implies. Therefore, a stop-loss is placed to limit your loss on your position.

Alternatively, it is slso known as a "stop order" or "stop-market order".

To set a stop-loss order for 20% below the price you paid for the currency (assuming that you are Long in the position), this will limit your loss if any to only 20%. This stop-loss strategy allows you to determine your loss limit in advance, and thus preventing emotional decision-making. What should be the limit of your loss? This is discussed in the post on Money Management. The recommended risk that you should take per trade is 2 -4% of your investment.

If your initial investment is $5000, the recommended risk should be between $100 to $200. Depending your lot size, assuming a 0.1 lot purchase, your stop-loss can be placed at a distance of 100 pips to 200 pips from the purchase price.

It's also definitely a great idea to make use a stop-loss order before you leave for holidays or you happen to enter a situation in which you will be unable to watch over the development of your currency pair for an extended period of time.

In the next post, we shall cover the take-profit and risk to reward aspect of Forex trading.