Stop-Loss Orders Explained
A stop-loss automatically sells your position if price drops to a certain level. It's your insurance policy against big losses.
What is a Stop-Loss?
A stop-loss order automatically triggers a sell when price falls to your specified level.
You buy Bitcoin at $50,000
You set stop-loss at $45,000
If BTC drops to $45,000, it automatically sells
Your maximum loss is limited to $5,000 (10%)
Why Use Stop-Losses:
- Limit losses - Cap your downside
- Remove emotion - Automatic, no panic decisions
- Sleep better - Protection while you're away
- Discipline - Enforces risk management
When NOT to Use Stop-Losses:
- Long-term holds you won't sell regardless (HODL)
- Extremely volatile, low-liquidity tokens
- During known high-volatility events
Setting Your Stop-Loss Level
Common Approaches:
Percentage-Based:
- Conservative: 3-5% below entry
- Moderate: 5-10% below entry
- Aggressive: 10-20% below entry
Technical Levels:
- Below recent support level
- Below moving average (like 50-day MA)
- Below recent swing low
Many traders risk only 2% of their portfolio on any single trade. If you have $10,000:
Max risk per trade = $200
If stop-loss is 10% below entry
Max position size = $2,000
Don't Set Stop-Loss:
- ✗ Too tight (normal volatility triggers it)
- ✗ At obvious round numbers (many stops cluster there)
- ✗ Right at support (often briefly breaks before bouncing)
Stop Order Types
Stop-Market Order:
When price hits your stop, it sells at market price (whatever's available).
- Pro: Guaranteed to execute
- Con: May sell at worse price in fast market
Stop-Limit Order:
When price hits your stop, it places a limit order at your specified price.
- Pro: Won't sell below your limit
- Con: May NOT execute if price falls through limit
| Feature | Stop-Market | Stop-Limit |
|---|---|---|
| Execution | Guaranteed | Not guaranteed |
| Price | May slip | Your price or better |
| Best for | Must exit | Price sensitive |
If price crashes fast through your limit, your order may never fill. For protection that MUST execute, use stop-market.
Common Stop-Loss Mistakes
Mistakes to Avoid:
- Stop too tight - Gets triggered by normal volatility
- Moving stop down - Defeats the purpose, leads to bigger losses
- No stop at all - "I'll just hold" → 90% loss
- Obvious levels - Whales hunt clusters of stop-losses
- Not adjusting - As price moves, adjust your stop
A trailing stop moves UP with price but doesn't move down. If BTC goes from $50K to $60K, your stop trails along. If it then drops, the stop triggers.
This locks in profits while letting winners run.
Stop-Loss Hunting:
Large players sometimes push price down to trigger stops, then buy cheap. To avoid:
- Place stops slightly below obvious levels
- Don't put stops at round numbers
- Use wider stops in volatile markets
Some traders use "mental stops" instead of actual orders. This requires discipline and availability. For most people, real stop orders are safer - they work even when you're asleep.