What is a stop-loss order?
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 4 min
In short
A stop-loss order sits dormant until the price reaches a trigger level, then fires automatically. It is used to stop a loss from growing, but it guarantees only that an order is sent — not the price at which it fills. In fast markets the fill can land well away from the trigger.
Key points
- Fires automatically once the trigger price is reached
- It guarantees the order, never the fill price
- Fast moves can fill far from the trigger
- Market and limit variants behave differently
Definition
An order placed at a price on the unfavourable side of the market, which is submitted only once that level is touched — the trigger, rather than the price, is what you are setting.
Say you buy bitcoin at 5,000,000 yen and set a stop-loss sell at 4,500,000. The moment the price touches 4,500,000 a sell order goes to the market, and if it fills there the loss stops at roughly 500,000 yen. The point is to have a pre-decided level acted on mechanically.
What people miss is that the stop is a trigger, not a promise of execution price. With the market variant, once triggered the order takes whatever the book offers, so a thin book or a sharp drop can fill it well below the level you chose. That gap is slippage.
The limit variant refuses to fill worse than your chosen price, but if the market gaps straight through it, nothing fills and the position stays open. Each has a weakness: the market version cannot promise a price, and the limit version cannot promise a fill.
Watch out for
- · In a violent move the fill can land far from the trigger, making the loss larger than planned
- · A stop-limit may not fill at all if the price gaps through it, leaving the position open
- · During an exchange outage the order may not be executed at all