An order placed with a broker to sell a security when it reaches a certain price in order to limit an investor's loss on a security position.

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Most professional CFD traders will not enter a trade without placing a stop loss to halt escalating losses. In brief, a stop loss involves placing a sell-order in the market at a pre-determined price. Let’s say that you bought share CFDs on Rio Tinto at $145. You could put a stop loss at $140. This means that if Rio Tinto hit $140 the stop loss would be automatically toss you out of the trade.

The big question for many traders is where do I place my stop loss?

Tight stop losses, which are placed at 1 or 2 per cent away from the entry price, will limit losses but will subsequently increase the chance of price volatility nudging you out of a trade. Wider stop losses, at say 10 to 20 per cent away from the entry price, will mean a bigger hit to your portfolio if you are stopped out, but will also spare you from being shoved out of a trade due to meaningless (only in hindsight) market wobbles.