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What is a stop loss?

A stop loss is a risk management tool used in trading to minimise potential losses. It allows traders and investors to set a predefined price level at which they are willing to sell an asset to limit their losses if the market moves against their position.

When initiating a trade, setting a stop loss involves determining the maximum amount of loss one is willing to tolerate. If the price of the asset moves contrary to the expected direction and reaches or surpasses the specified stop loss price, the trade is automatically executed at the prevailing market price, thereby closing the position and preventing further losses.

Stop losses are employed to protect investments and trading positions from significant downturns in the market. They serve as a preventive measure, enabling individuals to manage risk by imposing a limit on potential losses, even during times of high market volatility or unexpected price fluctuations.

By implementing stop loss orders, traders can focus on predefined risk levels, allowing for more disciplined and strategic decision-making while also helping to preserve capital and mitigate the impact of adverse market movements on their overall portfolio or trading account.