Apart from Take Profit, an equally important pre-calculated price level used by traders today is called Stop Loss. As the name suggests, this is a type of pending order that allows the trader to set a predefined level on the price chart that closes a losing position. In other words, it ensures a minimum loss as it closes the position. Stop Loss is abbreviated as (S/L).

For example, a trader goes long (in other words, enters a buy position) by entering the market at 1.2980, expecting prices to rally higher.

He knows that the market is unpredictable, however, and that it may go in the opposite direction than his expectation. So he calculates the risk before entering the market, and places a Stop Loss order below the entry price.

If the Bid price hits the predefined Stop Loss price at 1.2880, the position is closed and a minimum loss is ensured.

Similarly, if a trader enters a sell (short) position, expecting prices to fall, he would place a protective Stop Loss order at a higher level than the entry price in case prices spike up.

If the Ask price hits the predefined Stop Loss price, the position is closed and minimum loss is ensured.

Stop Loss has been designed to protect your capital by ensuring a minimum loss; it is a level set by the trader in advance according to how much he or she is willing to risk and/or lose. It’s important to remember that Stop Loss and/or Take Profit orders may be placed on Instant Execution accounts simultaneously when entering the market. On Market Execution accounts, you can specify a Stop Loss or Take Profit order when placing a pending order to enter the market.
Stop Loss and Take Profit are both crucial elements of Risk Management – something that will be covered in a future video.