A stop loss order is an order to stop your losses. In taking a loss you are preventing any further greater losses.
However you can also use stop losses to protect profits built up in a spread trade. For example, you may have bought the FTSE 100 index at 4100 a few days back, and it's now trading at 4250. You could elect to place a stop loss at 4200 to protect your profit in case the index falls below this figure. This is why most traders refer to stop losses as just stops.
Stop losses are just as heavily used for short trades. A trader who uses spread bets to sell short the Dow Jones index at 9200 may decide to place a stop at 9250. This would be referred to as a buy stop.
The most important point regarding stop losses is that you should have one. If you don't use stop losses or some other regimented way to take losses when dealing with margined products like spread betting, the market will likely get you and your money at some stage.
There is no exact science when deciding at what level to place a stop loss. Sometimes many factors come into play and experience is often the key when deciding the right level to place them. You will find that you learn a fair amount from putting your stops in the wrong place! This can be bad news in the short term, yet is often good news over the long run. Learning from your mistakes is the best education a trader or investor can receive. But, of course, 'stops' can help to make that learning experience less painful.
The main error people make when first using stops is to place them far too near to where the market is trading. If you want to cut down on the number of errors that you make when you start out, then try to place your stops far away from the current market price, giving the market plenty of room to move around without stopping you out.
