Stop Loss

Placing "stop loss" in case of trading CFDs is a very common practice followed by most of the professional traders. Stop Loss is a type of order that a trader places with his/her broker under which instructions are given to sell a security when it hits a certain price. Stop loss is an option that traders use to minimize their loss on a security position.

Say for example, Mr. X has bought share CFDs on ABC Ltd. at the rate of $50 and placed stop loss at $45. Now this means that Mr. X will be tossed out of the trade automatically in case ABC goes down to $45.

A tight stop loss will allow you to minimize your losses subsequently since it is placed 1 to 2 percent away from the entry price. But at the same time it will expose you to the risk of getting shoved out of the trade due to price volatility. On the other hand, the wider stop losses may strike hard to your portfolio when they get activated since these stop losses are placed 10 to 20 percent away from the entry price but at the same time, such stop losses will prevent you from getting shoved out of the trade due to market wobbles that are rather insignificant.