Stop loss
A stop loss is an order attached to a position that closes it automatically once price reaches a preset level, capping the loss on that trade.
When the stop level trades, the order becomes a market order, so the fill can be worse than the level in fast conditions — see slippage. Stop distance is measured in pips and converts to money through lot size: long one lot of EURUSD from 1.0900 with a stop at 1.0880 risks 20 pips, about $200.
A useful division of labor: the stop's location belongs to the strategy — beyond the level that invalidates the idea, or a volatility multiple — while the dollar amount at risk belongs to position sizing. Decide the stop first, then choose the size that makes the stop cost what you planned.
Example
Account $10,000, planned risk 1% ($100), stop 20 pips away on EURUSD. Size = $100 ÷ (20 pips × $10 per pip per lot) = 0.50 lots. Pip value is $5, so if the stop is hit the loss is 20 × $5 = $100 — the planned amount, not an accident.
In a prop-firm challenge
The stop loss is the primary tool for defending the daily loss limit and max drawdown. A position without one can end an evaluation in a single adverse move, and a few firms require a stop on every trade. Keeping each trade's risk to a small fraction of the daily allowance — commonly 0.5–1% of the account — leaves room for a normal losing streak, a discipline covered in risk management for funded traders.