A stop loss is an order that closes your trade automatically if price moves a set distance against you. You choose the exit level before you enter, so the most you can lose is decided in advance, not in the heat of the moment. When price reaches it, the trade closes at the next available price.
TL;DR: A stop loss caps the loss on one trade. The main types are fixed, trailing and ATR-based stops. Place the stop where your trade idea is proven wrong, then size the position so that distance equals the amount you are willing to risk. Stops can fill at a worse price (slippage) in fast markets, so leave a buffer below any account loss limit. Our lot size calculator turns your stop distance and risk into a position size.
Educational content only, not a personal recommendation. Examples are illustrative. Alpha Capital accounts are simulated accounts with simulated funds, and performance fees are not guaranteed.
How does a stop loss work?
When you open a trade, you attach a price at which you want out if you are wrong. On a buy, the stop sits below your entry. On a sell, it sits above. The platform watches the market for you, and once the bid (for a buy) or the ask (for a sell) reaches your stop, it sends an order to close the position.
Two points matter:
- A stop is a trigger, not a promise. Once triggered, a standard stop closes at the best price available at that moment. In a calm market that is your stop price or very close to it. In a fast market it can be worse.
- A stop only works if it is on the order. A "mental stop" depends on you watching the screen and acting without hesitation. Many losses that break an account start as a mental stop that was moved or ignored.
What are the main types of stop loss?
Type | How it works | Good for | Watch out for |
|---|---|---|---|
Fixed stop | Set at one price when you enter and left there | Clear, simple risk on every trade | Does not adapt if volatility changes |
Trailing stop | Follows price by a set distance as the trade moves in your favour, but never moves back | Locking in open profit in a trending move | A tight trail gets hit by normal pullbacks |
ATR-based stop | Distance set as a multiple of the Average True Range, a measure of recent volatility | Matching the stop to how much the market is actually moving | Wider stops in volatile markets mean smaller positions |
Fixed stop
The most common type. You decide the level before entry, often just beyond a recent swing high or low, and you do not move it except to reduce risk. Because the distance is known, the position size is easy to work out and every trade risks the same amount.
Trailing stop
A trailing stop moves with price. If you buy EURUSD at 1.0850 with a 20-pip trail and price rises to 1.0900, the stop moves up to 1.0880. If price then falls back, the stop stays at 1.0880, so the trade closes with 30 pips locked in. On MetaTrader 5, the built-in trailing stop runs in your trading terminal, so it stops updating if the terminal is closed.
A trailing stop on one trade is not the same thing as a trailing drawdown on an account. One is an order you set; the other is a rule that moves an account's loss limit up as the balance grows. Our guide to trailing vs static drawdown explains the account version.
ATR-based stop
The Average True Range (ATR) measures how far price has typically moved per candle over a set period, usually 14. An ATR stop places the exit a multiple of that distance away, commonly 1.5 to 2 times ATR. If the 14-period ATR on the hourly EURUSD chart is 12 pips, a 1.5 x ATR stop is 18 pips from entry. When the market gets quieter, the stop tightens; when it gets wilder, it widens, and the position size should shrink to keep the same risk.
Where should you place a stop loss?
The best stop is where your trade idea is clearly wrong, not where the loss happens to feel comfortable. A few common approaches:
- Beyond structure. For a buy, below the most recent higher low or a clear support zone. For a sell, above the most recent lower high or resistance. If price gets there, the setup you traded no longer exists.
- Outside normal noise. A stop a couple of pips from entry will often be hit by ordinary movement and the spread. Comparing your stop distance with ATR is a quick sense check.
- Away from obvious round numbers. Many stops cluster just beyond levels such as 1.0800. Price often reaches those levels briefly before reversing, so some traders leave a few extra pips of room.
Then work backwards: decide how much you are willing to lose if the stop is hit, and size the position to match the stop distance. Never move the stop further away to "give the trade room" once you are in. That turns a planned loss into an unplanned one.
What is slippage on a stop loss?
Slippage is the difference between your stop price and the price you actually get. A standard stop becomes a market order when it is triggered, so it fills at the next available price. Usually that is within a fraction of a pip. It can be much more when:
- a major economic release moves price several pips in a second
- the market opens after the weekend at a different price from Friday's close (a gap)
- liquidity is thin, for example around the daily rollover
If price gaps straight through your stop, the trade closes at the first price after the gap, not at your stop. That is why the loss on a stopped trade can be larger than planned. Our guide to slippage in forex covers the causes in more detail. Some brokers offer guaranteed stops for an extra charge; a standard stop has no such guarantee.
Worked example: sizing a trade around a stop (illustrative)
You have a $100,000 simulated account and want to buy EURUSD at 1.0850. Below entry, the last higher low is at 1.0828, so you place the stop at 1.0825: 25 pips away, just beyond that low.
- Planned risk: 0.5% of $100,000 = $500
- Pip value on EURUSD: about $10 per pip per standard lot
- Risk per lot: 25 pips x $10 = $250
- Position size: $500 ÷ $250 = 2 lots
If the stop fills exactly, the loss is $500. If a fast move fills it 3 pips worse, the loss is 28 pips x $10 x 2 lots = $560, or 0.56% of the account. The plan still works because the risk was set well below any hard limit.
Now compare a trader who uses the same 2 lots with a 45-pip stop. The planned loss is $900, and 5 pips of slippage takes it to $1,000. The stop was on the order, but the size was wrong for it.
Work it out for your own trade: enter your account size, risk percentage, stop distance in pips and instrument into the Alpha Capital lot size calculator to get the position size before you place the order.
How this works under prop firm rules
On a prop firm account, a stop loss protects more than one trade. It protects the account's loss limits, and those limits decide whether the account stays open.
Each plan has a maximum daily loss and a maximum overall loss. Alpha Capital checks daily-loss breaches against current equity, which includes the floating loss on open trades, so an open trade without a stop can breach the limit before you have a chance to react. Our Alpha Capital rules explained guide covers how each plan sets them, and the help centre explains the daily risk limits in detail.
Alpha Direct adds a third limit on each instrument. According to the Alpha Direct help centre article:
- the maximum risk per asset is 1% on all account sizes, and it applies from the first trade
- it is measured on open drawdown (equity), and losing positions on the same asset are combined, while profitable ones do not offset them
- a new trade on the same asset in the same direction within 10 minutes of closing one counts towards the same 1%
- the maximum daily drawdown is 3% and the maximum drawdown is 5%, trailing from the high-water mark
In practice, that means the stop on an Alpha Direct trade needs to close the position before the open loss on that asset reaches 1%. On a $100,000 account that is $1,000. In the worked example above, a 0.5% planned risk leaves room for slippage. A stop set at 0.95% leaves almost none, and a gap could reach the 1% threshold before the stop fills. Adding to a losing position on the same asset uses up the same 1%, even if each trade has its own stop.
The same logic applies to the daily limit on any plan. With a 3% daily limit and 0.5% risk per trade, six losing trades in a row would reach it. Know that number before the session starts.
Frequently asked questions
What is a good stop loss percentage?
There is no single right number. Many traders risk between 0.25% and 1% of the account per trade, and set the stop at a level that makes sense on the chart. On an account with a per-trade or per-asset limit, such as Alpha Direct's 1% maximum risk per asset, keep the planned risk well below that limit to allow for slippage.
What is the difference between a stop loss and a trailing stop?
A fixed stop loss stays at the price you set. A trailing stop moves in your favour as price moves, keeping a set distance, and never moves back. A trailing stop can lock in profit, while a fixed stop only limits the loss.
Can a stop loss fail?
A standard stop will close the trade once it is triggered, but not always at the stop price. In fast markets or after a weekend gap, it can fill at a worse price because of slippage. It can also fail to protect you if it was never placed, was moved further away or was cancelled.
Should I always use a stop loss?
Most risk frameworks treat a stop on every trade as the default, because it makes the maximum loss known in advance. On prop firm accounts, where loss limits are measured on equity, trading without a stop leaves the account exposed to a single bad move.
How do I calculate lot size from a stop loss?
Divide the amount you are willing to risk by the stop distance in pips multiplied by the pip value per lot. For example, $500 ÷ (25 pips x $10) = 2 lots on EURUSD. The lot size calculator does this for any instrument.
Sources
- Alpha Capital help centre: Alpha Direct
- Alpha Capital help centre: daily risk limits
- What is slippage in forex?
Alpha Capital Group is a proprietary trading firm based in the United Kingdom. Accounts operate in a simulated environment with simulated funds. Performance fees are performance-based and outcomes are not guaranteed.
