What is a Stop Loss Order?

A stop loss order is a term more generally used in the trading rather than the commercial world. It places a limit the amount a trader is willing to lose on a particular position.

In the commercial world, a stop loss order can be used by your business to set the worst rate at which you wish to buy or sell an amount of currency you are due to pay or receive.

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If you buy goods from overseas or sell to clients domiciled in another country, you will have a break-even figure at which you convert the receivable or payable to create the book-keeping entries for your general ledger. The rate that you use, is most likely “today’s” rate with a cushion built in to guard against currency fluctuation.

You can place an order with CurrencyTransfer.com to buy or sell at that break-even level. Thus, you will protect your worst case and be in a position to take advantage should the market move in your favour.

Let us say that you are selling spare parts to a company in the Eurozone. You will receive euros in settlement of your invoice since your customer insists on paying in his local currency.

The current rate at which you can sell euros versus the pound is 1.1400. In order to cover your exposure, you add a 1% “cushion” so you convert the amount of sterling you wish to receive at 1.1514 and that is the level at which you convert your sterling invoice. You then place a “stop-loss order” with CurrencyTransfer.com at the 1.1514 level.

When you receive the euros, you sell them to CurrencyTransfer.com at the market rate but if the pound has appreciated and the euro has depreciated more than 1% you are covered by your stop loss order which will have been executed and you deliver the euros to CurrencyTransfer.com thus protecting your margin.