What is a stop loss in forex trading?

What it means

The stop loss is the single most important number in a trading system, because it is the one that turns an opinion into a measurable risk. Without it, position size means nothing — you cannot know what a trade risks until you know where you are wrong. Every position-sizing formula in existence takes stop distance as an input.

Why it matters

Stop placement should follow market structure rather than an arbitrary dollar amount. A stop placed just beyond the swing point that would invalidate the setup is doing its job; a stop placed at "$5 because that is what I want to lose" is a wish attached to an order ticket, and it will be hit by ordinary noise.

What this changes in practice

On XAUUSD this matters more than on most instruments. We measured a median daily range of $76 across a year of five-minute bars, and at that volatility a $2 stop is hit by ordinary noise within an hour of entry 81% of the time. A $10 stop is hit 34% of the time. Neither is really a stop. Use ATR to size stops against current conditions instead.