In the terminology of fx risk management, a stop-loss order is triggered whenever an adverse movement in the exchange rate automatically triggers the execution of a forward contract aimed at protecting the exposure against further unfavourable movements. When protecting the budget, Stop Loss orders are often set by management when the firm faces a scenario of unfavourable forward points. In such a situation, delaying hedges makes sense.

When the market rate reaches the ‘tolerance level’ set by the firm’s risk managers, the stop-loss order is triggered and the hedge is executed.  Because it is triggered only if a certain level of the exchange rate is met, a stop-loss order is said to be a conditional order. In Currency Management Automation, stop-loss orders are paired with take-profit orders (another type of conditional order) aimed at locking-in favourable exchange rate movements.  

In order to avoid duplicating the volume of hedging, stop-loss and take-profit orders automatically cancel each other. For this reason, they are known as ‘OCOs’, or One-Cancels-the-Other.