What Is a Stop-Loss?
A stop-loss is a standing instruction to exit a position automatically if price reaches a level you chose in advance. It is the seatbelt of trading: mildly annoying every day, and the only thing that matters on the one day it matters.
How It Actually Works
You hold an asset at $100 and place a stop at $90. If price touches $90, the order triggers and sells. Two variants, one important difference:
- Stop-market triggers a market order. It always exits, at whatever price the book offers, which in a fast crash can be well below $90.
- Stop-limit triggers a limit order at a floor you set. It never fills worse than your floor, and in a crash it may not fill at all, leaving you holding through exactly the move you tried to escape.
Risks and Common Mistakes
- Placing stops at obvious levels. Round numbers and recent lows attract clustered stops, and sharp wicks that clear them out, the pattern traders call a stop hunt, are routine in crypto.
- Stops too tight for the asset's normal noise. A stop inside daily volatility is a donation. Size the position so the stop can live outside the noise; my position size calculator ties stop distance to risk properly.
- Moving the stop when price approaches it. That is not risk management. That is negotiating with yourself, and you lose.
- Assuming stops make leverage safe. Cascades can gap through stops; see liquidation.
When It Matters
Every trade should have a written invalidation point, even if you execute it manually. The mathematics of why small controlled losses beat large uncontrolled ones lives in my loss recovery calculator: down 50 needs plus 100 back.
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