What is a stop loss?

How do you limit a loss when you can’t be glued to the screen all the time? A stop loss, or stop-loss order, works like an alarm that doesn’t just alert you but triggers a trade order according to your settings.

Consider a hypothetical example: you buy a cryptocurrency at €100 and set a trigger price at €90. If the price the platform tracks reaches that level, the sell order is triggered. The amounts are only there to show how it works, not a suggestion of where a stop loss should be placed.

In a sell position, known as a short, the logic is reversed: the stop loss can trigger a buy when the price rises. A take profit serves a different purpose: it triggers the closing of a position when the price reaches a preset favorable level, with the aim of locking in a gain.

Why it matters

The crypto market trades around the clock, and a sharp move can happen while you’re asleep. A stop loss lets you set a response in advance, instead of making the decision in a panic. We treat it as a risk management tool, not as insurance that covers every eventuality.

What to watch out for

The trigger price is not a guaranteed execution price. With a stop-market order, as soon as the stop is triggered, a buy or sell order is sent to the market. If the move is sharp or liquidity is low, the order may be filled at a worse price. This difference is called slippage.

With a stop-limit order, once triggered, an order with a price limit is placed. The limit controls the acceptable price, but the order may be filled only partially or not at all if the market moves past it.

Also check which price the platform uses for the trigger, especially in derivatives. A brief price swing can trigger the stop before the market bounces back. And when leverage is involved, a stop loss doesn’t guarantee that you’ll avoid a forced liquidation.