More often than not, CFD brokers and dealers automatically provide a free stop-loss order service to their trading clients. This is to encourage people to limit their losses on this very risky leveraged trading instrument. A stop loss on your CFD is exactly that, a tool for the trader to limit their trading losses. It is up to the trader to self regulate their usage of this tool and any trader is encouraged to utilise the tool in their trading systems.
For example you have opened a long position on XYZ stock at $10, but you only want to limit your trading liabilities to 50 points so you can set a stop loss on your CFD trade at $9.50. So if your trade goes sour, the stop loss order immediately executes a sell to exit your long position.
However, these is a disadvantage and also risk to using a stop loss. For instance, if the market is having a stormy day at sea, that is, an over-volatile market where the underlying stock under the CFD is spiking up and down, you may find that you are stopped out too easily if you have put your stop loss order too close to the action. The risk when using a stop loss is when the market gaps and the stock just doesn’t trade at your stop loss limit. If you think about it – it’s a VERY BIG risk. However an advantage to the stop loss order on your CFD is that if gives you the discipline to follow a system as it automatically takes you out a trade which at some point in time you expected to make you a profit because it was trending to some sort of pattern. That is only an advantage if you resist the urge to continuously move the CFD stop loss. (!)