An order to close out if the market price reaches a specified price, which may represent a loss or profit.
A stop-loss order prevents additional losses if the price goes against you.
If you are in a long position, it is a sell STOP order.
If you are in a short position, it is a buy STOP order.
REMEMBER THIS TYPE OF ORDER.
A stop-loss order remains in effect until the position is liquidated or you cancel the stop loss order.
For example, you went long (buy) EUR/USD at 1.2230. To limit your maximum loss, you set a stop loss order at 1.2200.
This means if you were dead wrong and EUR/USD drops to 1.2200 instead of moving up, your trading platform would automatically execute a sell order at 1.2200 the best available price and close out your position for a 30-pip loss.
Stop losses are extremely useful if you don’t want to sit in front of your monitor all day worried that you will lose all your money.
You can simply set a stop-loss order on any open positions so you won’t miss your basket weaving class or elephant polo game.
Please note that a stop-order is NOT guaranteed a specific execution price and in volatile and/or illiquid markets. It may execute significantly away from its stop price. Stop-orders may be triggered by a sharp move in price that might be temporary. If your stop order is triggered under these circumstances, your trade may exit at an undesirable price. During a sharp price decline, a SELL stop-loss order is more likely to result in an execution well below the stop price. If triggered during a sharp price increase, a BUY stop loss order is more likely to result in an execution well above the stop price.
Another type of forex order is the trailing stop.
A stop-loss order which is always attached to an open position and which automatically moves once profit becomes equal to or higher than a level you specify.
A trailing stop is a type of stop-loss order attached to a trade that moves as the price fluctuates.
Let’s say that you’ve decided to short USD/JPY at 90.80, with a trailing stop of 20 pips.
This means that originally, your stop loss is at 91.00. If the price goes down and hits 90.60, your trailing stop would move down to 90.80 (or breakeven).
Just remember though, that your stop will STAY at this new price level. It will not widen if the market goes higher against you.
Going back to the example, with a trailing stop of 20 pips, if USD/JPY hits 90.40, then your stop would move to 90.60 (or lock in 20 pips profit).
Your trade will remain open as long as the price does not move against you by 20 pips.
Once the market price hits your trailing stop price, a market order to close your position at the best available price will be sent and your position will be closed.
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