What is a stop-loss and how to manage risks in spot trading

Stop-loss is a risk management tool that helps traders protect their investments from excessive losses. The stop-loss order system triggers automatically when the asset’s price drops to a set level, allowing you to lock in a loss before it becomes critical. Nearby, a take-profit order works to secure profits at the desired moment. Together, they form the foundation of professional risk management in the spot market.

Basics: What is a stop-loss and how does it complement take-profit

To trade effectively, you need to understand the main position management tools. A stop-loss order triggers when a certain price is reached, preventing further losses. Conversely, a take-profit order locks in gains at a target level. Together, they create a system where the trader predefines acceptable maximum losses and desired profits.

The platform offers two main options: TP/SL orders (take-profit/stop-loss) and pre-set orders when placing a limit order. Assets are reserved when placing a stop-loss, ensuring its execution when the trigger is activated.

Differences between stop-loss, TP/SL, and other order types

Before understanding how a stop-loss works, it’s important to distinguish it from similar tools:

TP/SL order (take-profit/stop-loss):

• Assets are reserved immediately upon placement
• Triggered when the trigger price is reached
• Can be market (executes at the best available price) or limit (waits for a specific price)

OCO order (One-Cancels-the-Other):

• Uses only one side of margin
• When one order executes, the other is automatically canceled
• More flexible in fund usage than a simple TP/SL

Conditional order:

• Assets are not reserved until the trigger activates
• Executes later than TP/SL orders
• Saves margin until activation

What is a stop-loss among these? It’s the most reliable option for protecting a position, as funds are already reserved and the order is guaranteed to execute.

How stop-loss works in spot trading

Let’s break down the mechanics of a stop-loss step-by-step. When a trader places a stop-loss order, they specify:

• Trigger price — the level at which the order will activate
• Execution type — market (immediate) or limit (at a specific price)
• Order size — the amount of assets to sell

Market stop-loss: quick position closure

Using a market stop-loss, the order executes immediately at the best available market price. This follows the IOC (Immediate-Or-Cancel) principle: any part of the order that cannot be filled due to insufficient liquidity will be canceled. The advantage of this approach is guaranteed execution; the downside is possible slippage during high volatility.

Limit stop-loss: controlled closure

A limit stop-loss is placed in the order queue and waits until the price reaches the set level. If, when triggered, the best bid price is above the limit, the order executes immediately. If not, it remains in the queue. This provides more control over the price but carries the risk that the order may not be filled if the price moves quickly.

Practical examples of using stop-loss orders

Example 1: protection against sudden news drops

You bought BTC at 40,000 USDT. To limit losses to 5%, you set a market stop-loss trigger at 38,000 USDT. If the price drops to this level, the order triggers automatically, closing your position at the best available price.

Example 2: combining TP and SL when placing a main order

A trader places a limit buy order for BTC at 40,000 USDT and pre-sets:

• Take-profit: trigger at 50,000 USDT, limit price 50,500 USDT
• Stop-loss: trigger at 30,000 USDT, market order

After the main order executes, the TP and SL activate:

Scenario 1 — price rises to 50,000 USDT: Take-profit triggers, the stop-loss order is automatically canceled. The limit sell order at 50,500 USDT waits to be filled.

Scenario 2 — price falls to 30,000 USDT: Stop-loss triggers, a market order is placed, and 1 BTC is sold at the best available price. The take-profit is canceled.

Important rules and limitations when using stop-loss

What is a stop-loss in the context of platform restrictions? It’s a tool operating within strict rules:

Price limits:

• When buying with a pre-set stop-loss, the trigger price for TP must be above the limit order price, and SL must be below
• When selling — the opposite: TP below, SL above
• TP/SL order prices cannot exceed set percentage limits (e.g., 3% for BTC/USDT)

Minimum sizes:

• After executing the main order, the total size of TP/SL must meet the platform’s minimum order size
• If the amount is insufficient, the order may not be placed

Volume limits:

• The maximum size of a market order is often lower than that of a limit order
• If the limit order exceeds the maximum for a market order, placing a market stop-loss will be rejected

Risks with limit orders:

• After trigger activation and placement of a limit stop-loss, the opposite order (TP or SL) is immediately canceled
• If the price bounces back, the limit stop-loss may not be filled, but its counterpart is already canceled
• Therefore, caution is advised when using limit options

Detailed restrictions for each trading pair are specified in the platform’s spot trading rules. Understanding what a stop-loss is and how to set it up correctly will help you manage risks more effectively and protect profits in any market conditions.