What is a stop-loss in crypto? Explained with examples

You buy some crypto, the price drops, and you think: "it will come back". Sometimes it does. Sometimes the price just keeps falling, and a week later you are looking at a loss much bigger than you ever wanted. A stop-loss is meant to prevent that: you decide in advance, at a calm moment, how far you let a loss run.

In this article you will learn what a stop-loss is, which types exist, where you can place one and which mistakes beginners often make.

What is a stop-loss?

A stop-loss is an order you set in advance that only kicks in when the price reaches a certain level: the stop price. When that happens, your position is closed (fully or partly). So you don't have to watch the chart all day.

An example with virtual money: you buy 0.01 BTC at $60,000 per bitcoin, so for $600. You set a stop-loss at $57,000. If the price falls to $57,000, your position is sold. Your loss is then about $30 (5%), plus any fees. If the price rises, nothing happens and your position stays open.

The biggest effect is in your head: you make the hard decision before you enter, not in the middle of a drop, when fear and hope get mixed up.

Stop-market and stop-limit: what's the difference?

Most platforms offer two versions.

• Stop-market: as soon as the stop price is hit, a market order is sent. Your position is then almost certainly closed, but not necessarily exactly at your stop price. In a fast drop, the fill can be lower.
• Stop-limit: as soon as the stop price is hit, a limit order is placed with a minimum price you choose. You know how low you will sell, but if the price jumps past that level in one move, your order can stay open. Then you are still in the position while the price keeps falling.

In short: stop-market gives you certainty of execution, stop-limit gives you certainty of price. When the goal is to limit a loss, many traders therefore choose execution. Read more about that difference in market order vs. limit order.

Where do you place your stop-loss?

There is no magic percentage that always works. There are a few principles:

1. Place it where your idea is no longer valid. If you buy because you expect a certain price zone to hold, your stop belongs just below that zone. If the zone breaks, the reason for your trade is gone.
2. Leave room for normal swings. Crypto prices often move several percent in a day. A stop that is too tight gets hit by ordinary noise before your idea has had a chance.
3. Work out what it costs first. The distance to your stop decides how much you lose if it is hit. If that amount is too large, choose a smaller position instead of a tighter stop. How to calculate that is explained in how to calculate your position size.

Slippage and price gaps: the limits of a stop-loss

A stop-loss limits your loss, but it is not a guarantee. Two things can make your loss bigger than planned:

• Slippage: if there are few buyers at the moment of execution, your sale is spread over several price levels. The average price is then lower than your stop price.
• Price gaps: after big news or in very quiet markets, the price can jump from $58,000 to $55,000 in one go. A stop at $57,000 is then only filled around $55,000.

So always allow for a margin. A stop-loss is a safety net, not a wall.

The trailing stop, briefly explained

A trailing stop moves up when the price rises, but does not move down when the price falls. Say your trailing stop sits 5% below the highest price since you entered. If bitcoin rises from $60,000 to $66,000, your stop moves up to $62,700. If the price then falls, the stop stays at $62,700.

This way you keep part of a rise without having to move your stop yourself. The downside: in a choppy market you are sometimes stopped out early, just before the price rises again.

Four common mistakes

• A stop that is too tight. You keep getting stopped out by ordinary swings, and you pay fees every time.
• Lowering your stop as the price gets close. This is the most human mistake. You move the line "just once more", and a small loss becomes a big one.
• No stop "because it always comes back". Sometimes it doesn't. Or only after months, while your money is stuck.
• A stop that only exists in your head. "I'll sell if it goes below $57,000." But if you are asleep, at work or hesitating at that moment, nothing happens.

Practise using a stop-loss in Nova

In Nova every account starts in paper mode: you practise with virtual money on live prices. A stop-loss is mandatory in Nova: you cannot place an order without one. That way it becomes a habit instead of something you forget.

On top of that, risk limits sit above everything else (you can only make them stricter, never looser), and the kill switch stops all new orders with one button (plus a confirmation). Keep in mind that results in paper mode are simulated: real execution, fees and above all emotions can turn out differently. Read also what paper trading is and where its limits are.

Want to feel what it's like when your stop-loss is hit? Create a free account and try it with virtual money.

Frequently asked questions

Is a stop-loss always a good idea?

A stop-loss is a tool to cap your loss per trade, which is why many traders use one. Whether and how you use it depends on your own situation. This article is an explanation, not financial advice.

Is my stop-loss always filled exactly at the stop price?

No. With a stop-market, the fill can be lower because of slippage or a price gap. With a stop-limit, your order may not be filled at all.

What is the difference between a stop-loss and a take-profit?

A stop-loss closes your position when the price moves against you. A take-profit closes your position when the price reaches a target you picked in advance. It's best to set both before you enter.

Can I practise with a stop-loss without real money?

Yes. With paper trading you practise with virtual money on live prices. That way you learn how a stop-loss works without a mistake costing you money.