What is a stop-loss, and how do you set one?
A stop-loss is a decision you make while calm, so you do not have to make it while the price is crashing.
- A stop-loss is a pre-set exit that limits how much a single trade can lose.
- Place it where your idea would be proven wrong, and outside the coin’s normal daily noise.
- It is not a guarantee. In fast markets the exit price can be worse than your stop.
What a stop-loss does
You choose a price below your entry. If the market falls to it, your exchange sells for you. The loss is then limited to roughly the distance between your entry and your stop, multiplied by the amount you hold.
Why plan it before you buy
Under stress most people hold on, hoping for a bounce, and small losses become large ones. Deciding the exit in advance removes the emotion. A “mental stop” that you promise yourself to follow is much easier to break than an actual order.
Where to place it
- Below a level that proves you wrong. If you bought because a coin held a recent low, a stop just below that low makes sense.
- Outside normal noise. If a coin normally swings 6% in a day, a 2% stop will probably trigger on an ordinary wobble. Check a coin shows the normal daily swing.
- Not at a round number everyone uses. Crowds of stops sit there.
For a deeper comparison of methods see where to place a stop-loss.
The stop decides your position size
Work backwards. First choose how much you accept to lose, then divide by the distance to your stop.
You have 1,000 USDT and accept losing 1% (10 USDT). You buy at 100 with a stop at 94, which is 6% below. Position size = 10 / 0.06 = about 167 USDT. If the stop is hit, you lose about 10 USDT, not 167.
The position size calculator does this including fees.
Stop-market and stop-limit
A stop-market order sells at the next available price once your stop price is reached, so it almost always executes but may do so below your stop. A stop-limit sells only at your limit price or better, so it may not execute in a fast drop. Know which one your exchange gives you.
Where stops fail
- Price gaps and fast crashes can fill you well below the stop (slippage).
- On thinly traded coins, a stop can be triggered by one large order and then the price recovers.
- A stop does not protect you from a scam token you cannot sell.
Common mistakes
- Setting the stop after the price has already moved against you.
- Moving the stop further away to avoid being stopped out.
- Using a stop tighter than the coin’s normal daily swing.
- Not working out the position size from the stop.
See a coin’s normal daily swing and a stop distance outside it.