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MadMarketScientist

Stop Loss Definition

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The concept of the stop loss is for the protection of a trader’s account from devastating losses if an active trade is in a losing position. There are different ways to apply a stop loss order. On some broker platforms, the stop loss can be applied as a limit order or OCO (order cancels order). On the MT4 platform, this is a lot simpler as all a trader needs to do is to select the stop loss as part of the modify/delete trade order mechanism, which only functions on an active trade.

 

Whichever style your broker presents to you, the stop loss order carries the same function. It automatically closes a trade at a pre-determined level when the position has moved against the trader. A stop loss does not always work; if there is abnormal volatility in the market such as the one that occurred after the September 11, 2001 attacks on the World Trade Center, the massive contrarian pressure on prices will produce a slippage and the stop loss will be taken out without the trade being closed. This situation also occurs after a weekend gap if the trader is on the wrong end of the trade.

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