Definition
A stop-loss is an order that automatically closes a position when the price reaches a level you set in advance, to limit the loss on a trade.
How it works
A stop-loss stays inactive until the trigger, called the stop price, is reached. For a long position the stop is below the entry; for a short position it is above. When triggered, it becomes either a market order or a limit order, depending on the type chosen.
A stop-market order becomes a market order, so it almost always closes the position, but the fill can be worse than the stop price when the market moves fast or gaps, meaning it jumps past a level without trading in between. A stop-limit order becomes a limit order at a price you set, so the exit price is protected, but if the market moves past the limit, the order may not fill and the position stays open. Some exchanges also let you choose whether the trigger uses the last price or the mark price.
Placement is usually based on the price level that would show the trade idea is wrong, such as just beyond a recent low or high, rather than on a round number. The distance from entry to stop is also the input for position sizing: amount at risk ÷ stop distance gives the position size. A stop placed too close is often hit by normal price noise.
Example (hypothetical numbers)
Suppose you buy 100 Token X at $20 and place a stop-market order at $18.50, just below a recent low that would show your trade idea was wrong.
Planned loss = ($20 − $18.50) × 100 = $150, before fees.
If the price gaps from $18.70 straight to $18.00, the stop triggers and fills near $18.00: ($20 − $18.00) × 100 = $200.
A stop-limit with a $18.40 limit would not fill at $18.00 and the position would stay open, which shows that a stop limits planned risk but does not guarantee the exit price.
Common mistakes
- Placing the stop so close to the entry that normal price swings trigger it.
- Assuming a stop-market order always fills exactly at the stop price.
- Moving the stop further away as the price approaches it, which enlarges the planned loss.
- Setting the stop at a round number with no link to the trade setup.
Related calculators
This glossary is for education only and is not investment advice. Examples use hypothetical numbers.