Stop-Loss and Take-Profit Orders: A Beginner's Guide to Exits

The main order types

• Stop-market order, often just called a stop-loss: you choose a trigger price, called the stop price. When the market reaches it, the exchange sends a market order to sell (or to buy, if you are short) at the best price available. It will almost always fill, but the fill price can be worse than your stop.
• Stop-limit order: when the stop price is reached, a limit order is placed at a price you set. You control the worst price you will accept, but if the market moves past your limit too quickly, the order may not fill at all and you stay in the position.
• Take-profit order: an order that closes your position once the price reaches a target in your favour, securing a gain you planned for. Depending on the platform, it may execute as a market or a limit order.
• Trailing stop: a stop that follows the price as it moves in your favour, staying a fixed amount or percentage behind it. It never moves back. If the price reverses by that distance, the order triggers.

Names and exact behaviour differ between exchanges, so read your platform's help pages before relying on any of them.

Where to place them

A stop-loss should sit where your trade idea is proven wrong, not at a random round number or at whatever loss feels comfortable. If you bought because the price held above a support zone, a sensible stop is usually a little below that zone, giving the price room for normal noise. Placing it exactly on an obvious level is risky, because many other traders put their stops there too, and brief moves through such levels are common.

Take-profit targets often go just before the next resistance zone, where sellers have appeared in the past. Once you know where the stop and target are, you can work out your position size: how much to buy so that, if the stop is hit, you lose only the amount you decided you could afford.

A hypothetical example

These numbers are made up for illustration. Say you have a $5,000 trading account and decide to risk at most 1% on one trade, which is $50. You want to buy a coin at $2.00, and your chart suggests the idea is wrong if the price falls below $1.80. That is a risk of $0.20 per coin.

Your position size is $50 ÷ $0.20 = 250 coins, which costs $500. You set a stop-loss at $1.80 and a take-profit at $2.40. If the stop is hit, you lose about 250 × $0.20 = $50. If the target is hit, you gain about 250 × $0.40 = $100, twice what you risked. Fees would reduce both results slightly.

If you used a 10% trailing stop instead and the price climbed to $2.50, your stop would move up to $2.25, which is 10% below $2.50. A drop from there would close the trade at around $2.25, keeping part of the gain.

Slippage, gaps and quiet markets

Slippage is the difference between the price you expected and the price you actually got. When a stop-market order triggers during a fast move, it sells into whatever buy orders are left in the order book, and those may be well below your stop. In the example above, if the price fell suddenly and your order filled at $1.70, your loss would be 250 × $0.30 = $75 instead of $50.

Crypto trades around the clock, but liquidity is not the same at all hours. Weekends, holidays and quiet overnight sessions often have fewer orders on the book, so prices can jump more easily. A sharp move can skip straight past your stop price, which traders call a gap. A stop-limit order may then stay unfilled, while a stop-market order fills at a worse price. No order type can promise an exact exit.

Leverage and liquidation

Leverage means trading with borrowed funds, which makes both gains and losses larger. With 10x leverage, a 10% move against you equals your entire margin, the money you put up. In practice the exchange usually closes your position before that point, which is called liquidation, because it requires a minimum amount of margin to keep a position open, and fees add to the cost.

A stop-loss on a leveraged trade must sit well before the liquidation price, or it will never get the chance to act. For beginners, the safest choice is usually to avoid leverage entirely until you fully understand how your exchange calculates margin and liquidation.