Stop-loss order
Also called: stop loss · SL · stop
Definition
A stop-loss order is an order that automatically closes your position when the price reaches a level you set, limiting how much you can lose on a trade.
How stop-loss order works
You choose a trigger price below your entry for a long position, or above it for a short. When the market reaches that trigger, the exchange sends a market order or a limit order to close the position. Exchanges may let you choose whether the trigger uses the last traded price or the mark price.
A stop-loss turns an open-ended risk into a planned one. If you know where your stop is, you can size the position so that being stopped out costs a fixed share of your account, such as 1 or 2 percent. On leveraged positions, a stop placed well before your liquidation price protects you from losing the whole margin.
Stops are not perfect. In a fast crash or a price gap, a market stop can fill noticeably below the trigger because of slippage, and a stop-limit may not fill at all. Placing a stop too close to the entry can get you stopped out by normal volatility, so set it where your trade idea is proven wrong.
Example
Suppose you have a 10,000 USDT account and you want to risk at most 1 percent, or 100 USDT. You plan to buy a coin at 50 USDT with a stop-loss at 46, a risk of 4 USDT per coin. That means you can buy 25 coins, a position of 1,250 USDT. If the price falls to 46, the stop sells and you lose about 100 USDT plus fees and any slippage, instead of watching the loss grow.
Common mistakes
- Moving the stop-loss further away when the price approaches it.
- Setting stops at obvious round numbers where many other stops cluster.
- Relying on a stop placed beyond the liquidation price on a leveraged position.
Learn and practise
FAQ
Where should I put my stop-loss?
Place it at a price that would show your trade idea is wrong, such as below a key support level, then size the position so the loss at that level fits your risk limit.
Can a stop-loss fail?
A stop-market order will almost always execute, but it can fill at a worse price during gaps or crashes. A stop-limit can fail to fill if the price moves past your limit.
Does a stop-loss protect me from liquidation?
It can, if it triggers before the liquidation price. Check both levels on your futures position.