What is a stop loss?

What it is

A stop loss is an instruction to automatically close a trade if the price moves against you by a specified amount. It is your safety net — the maximum loss you are willing to accept on any single trade before cutting it.

If you buy EUR/USD at 1.1000 and set a stop loss at 1.0970, your position will be automatically closed if price falls to 1.0970 — limiting your loss to 30 pips, whatever happens afterwards.

How it works

A stop loss is a pending order sitting at your broker. When price reaches the stop loss level, the order becomes a market order and your trade is closed at the best available price. In normal market conditions this is very close to the stop loss level. In fast-moving markets (news events, gaps), there can be slippage — meaning the actual close price may be a few pips worse than your stop.

Types of stop loss

Fixed stop loss: Set at a specific price level that doesn't move. Simple and common in EAs.
Trailing stop loss: Moves with the price as the trade goes in your favour, locking in profits while still providing downside protection.
Virtual stop loss: Some EAs manage stop losses internally rather than placing them on the broker — meaning the stop isn't visible to the market. This has advantages and disadvantages.

Why it matters

Without a stop loss, a losing trade can keep losing indefinitely — until you close it manually or your account is margin-called. For automated trading, this is particularly dangerous because the EA may have no mechanism to close a trade that moves far beyond its expected range.

Many martingale EAs deliberately avoid stop losses, instead opening more positions as the market moves against them. This is a legitimate strategy but dramatically increases the risk of catastrophic loss if the market doesn't reverse.

Common misconceptions

A tighter stop loss is not safer. A stop loss set too close to entry will be hit regularly by normal market noise — "stopped out" before the trade had a chance to develop. The stop should be placed beyond likely noise, not just at a round number.
Stop losses don't guarantee a fixed loss. In fast markets, slippage means your actual exit price may be worse than your stop level. In extreme cases (flash crashes, weekend gaps), slippage can be significant.
Stop loss and take profit should be considered together. A 20-pip stop with a 5-pip take profit means you need to win 4 times for every loss just to break even. Risk-reward ratio matters as much as the stop level itself.

The Karnek note

Karnek is read-only monitoring for MetaTrader - it watches every account you run, live on one dashboard, and alerts you the moment something stops. It never trades and never asks for a trading password.

See it in Karnek: see how Karnek works.