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Stop loss or stop order is a point in the market where you tell your forex broker to take you out of the market when you order isn't going the way you expected.
Let's look at an example for EUR/USD pair:
You are placing an Entry order:- You want to buy order @ 1.3400: cause you believe that the market will move up when it hits 1.3400
- Now, if the market comes down INSTEAD of going up - you want to save your capital. So, you tell your forex broker (using your trading station software) that you want to be removed from the market if the market comes down 1.3350 - THIS IS CALLED AS A STOP LOSS.
Trading forex is not just about winning - yes! you need to place winning trades - but it is also about cutting your losses when you placed a wrong trade.
Stop loss is mechanical and does not have any emotions - however, most people once they placed the order - keep moving the stop loss - this is a VERY BAD IDEA.
Stop loss is provided for ONE single purpose - to remove you from the market when it isn't going the way you predicted - thus saving your capital and this allowing you to place more trades.
in conclusion STOP LOSS is just that - it STOPS your LOSSES.
Stop loss is the opposite of LIMIT ORDER - read more about it in the next chapter
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