What is a Stop-Loss?

A stop-loss is an order that automatically closes your position when the price reaches a predetermined level, limiting your loss. It’s your safety net when trades go wrong.

Why Stop-Losses Matter

Risk Management

  • Limits maximum loss per trade
  • Removes emotional decisions
  • Allows you to sleep at night
  • Protects against flash crashes

Trading Discipline

  • Forces pre-defined risk
  • Prevents “hoping” positions recover
  • Systematic approach to losses

Types of Stop-Loss Orders

Stop-Market Order

  • Triggers at stop price
  • Executes as market order
  • Guaranteed execution
  • May have slippage

Stop-Limit Order

  • Triggers at stop price
  • Places limit order at specified price
  • May not execute in fast markets
  • More price control

Trailing Stop

  • Moves with favorable price action
  • Locks in profits as price rises
  • Fixed distance or percentage
  • Great for trending markets

Setting Stop-Losses

Based on Technical Analysis

  • Below support levels
  • Below moving averages
  • Below recent swing lows
  • Consider volatility (ATR)

Based on Risk Tolerance

  • 1-2% of account per trade
  • Calculate position size accordingly
  • Never move stop-loss further away

Example Calculation

Account: $10,000 Risk per trade: 2% = $200 Entry: $70,000 Stop-loss: $68,000 (2.86% below) Position size: $200 ÷ $2,000 = 0.1 BTC ($7,000 position)

Stop-Loss Placement

Too Tight

  • Gets triggered by normal volatility
  • Stopped out before trade can work
  • Death by a thousand cuts

Too Wide

  • Large losses when triggered
  • Defeats purpose of risk management
  • Better to use smaller position

Just Right

  • Below logical support
  • Accounts for volatility
  • Acceptable loss if triggered

Stop-Loss on Exchanges

Spot Trading

Available on:

Futures Trading

  • Stop-market and stop-limit
  • Often combined with take-profit
  • Can be set as percentage

Common Stop-Loss Mistakes

Moving Stop Further Away

  • “Just a bit more room”
  • Leads to larger losses
  • Breaks risk management

Not Using Stop-Loss

  • Hoping for recovery
  • Turning trades into “investments”
  • Can lead to devastating losses

Placing at Obvious Levels

  • Round numbers attract stop hunts
  • Place slightly beyond obvious levels
  • Consider liquidity zones

Using Mental Stops

  • “I’ll sell if it hits X”
  • You won’t (emotions take over)
  • Always use actual orders

Stop-Loss Hunting

What It Is

Large players push price to trigger clusters of stop-losses, then price reverses.

How to Avoid

  • Don’t place at obvious levels
  • Give stops some breathing room
  • Use less common price points
  • Accept some stop-outs are unavoidable

Stop-Loss Best Practices

Before Entering Trade

  1. Determine stop-loss level
  2. Calculate position size
  3. Set stop immediately after entry
  4. Document your reasoning

During Trade

  1. Don’t move stop further away
  2. Can move stop to breakeven
  3. Can trail stop with profits
  4. Stick to the plan

After Stop-Loss Triggers

  1. Accept the loss
  2. Review the trade
  3. Don’t revenge trade
  4. Move to next opportunity

Stop-Loss and Leverage

Critical Relationship

With leverage, stop-losses are even more important:

  • 10x leverage: 10% move = 100% account loss
  • Stop-loss prevents liquidation
  • Keeps you in the game

Calculate for Leverage

Stop-loss must be tighter than liquidation price Always leave buffer above liquidation

Mental Framework

Accepting Losses

  • Losses are part of trading
  • Stop-loss means the trade didn’t work
  • Not a reflection of you as a trader
  • Professional traders lose 40-50% of trades

The Real Risk

The real risk isn’t triggering your stop-loss—it’s NOT having one and losing your entire account.