Stop loss is a risk management tool and take-profit for protecting profits.

Stop-loss is a protective mechanism that automatically sells your assets when a loss threshold is reached. It is one of the critically important tools for any trader, helping to limit losses. Alongside this, take-profit allows you to lock in profits at the right moment, especially when the market is volatile and can turn in any direction. Together, these two mechanisms form the foundation of risk management in trading.

How does a stop-loss work: the essence of the mechanism

When you open a position, you automatically set a specific price at which the position should close if it’s at a loss. A stop-loss order triggers when the price of the underlying asset falls to your set trigger level. Once activated, a market or limit order for sale is immediately placed.

Imagine: you bought BTC for 40,000 USDT. You decide that if the price drops to 38,000 USDT, you need to exit. That’s why you set a stop-loss at 38,000. When BTC drops to this level, the trigger activates, and your coins are sold.

Take-profit: locking in gains at the right time

Take-profit works in the opposite way. If the stop-loss protects against losses from below, then take-profit locks in gains from above. The trader sets a target price level, and when it’s reached, the position automatically closes with a profit.

Using the same BTC example: you bought at 40,000 USDT, but expect the price to reach 50,000 USDT. You set a take-profit at 50,000. When this level is hit, the order triggers, and you realize a profit without needing to monitor the chart manually.

How TP/SL orders differ from OCO and conditional orders

Although TP/SL are similar to conditional orders, there are fundamental differences that affect how your assets are used:

The key difference between stop-loss and take-profit orders and conditional orders is that capital is reserved immediately. This means you cannot use these assets for other operations until the order triggers.

How stop-loss and take-profit work in spot trading

Placing TP/SL directly from the order panel

When placing an order, you specify three key parameters:

• Trigger price – the level at which the order activates
• Order price – the price at which the order will be executed (for limit orders)
• Order size – the amount of assets to buy/sell

After placement, assets are reserved. As soon as the last trade price reaches the trigger level, either a market or limit order will execute depending on your settings.

Market order upon stop-loss trigger

If you choose a market order, then upon trigger activation, the position will close immediately at the best available price. This guarantees execution, but the price may be worse than your trigger price due to slippage.

For example, trigger set at 19,000 USDT, but at trigger activation, the best sale price is 18,800 USDT. The order will execute at 18,800 since it’s a market order.

Limit order: more precise price control

A limit order offers more control but also more risk. After trigger activation, the order enters the order book and waits for execution at the set price. If the best available price is better than your limit, it executes immediately. If not, it remains in the queue.

Scenario: trigger price 21,000 USDT, limit order price 21,000 USDT. When the trigger activates, if the best bid is 21,050, the order will execute at 21,050 (advantageous). But if the price drops to 20,950, the order stays in the queue waiting for 21,000.

Pre-setting TP/SL with limit orders

A professional approach is to place pre-prepared TP and SL orders simultaneously with the main limit order. After the limit order executes, both protective mechanisms activate automatically.

This saves margin, as the logic resembles OCO orders: when one triggers, the other is canceled. You don’t need to manually monitor and cancel one of them.

Step-by-step example with pre-setting

1. You place a limit buy order for BTC at 40,000 USDT, 1 BTC

2. Simultaneously, you set:

   • Take-profit: trigger at 50,000, sell price 50,500
   • Stop-loss: trigger at 30,000 (market order)

3. Scenario A: Price rises to 50,000 → take-profit triggers, limit order at 50,500 enters the order book, stop-loss is canceled.

4. Scenario B: Price falls to 30,000 → stop-loss triggers, a market sell order is placed, BTC is sold at the best available price, take-profit is canceled.

This approach is highly efficient, as you clearly define two scenarios: exit with profit or exit with limited loss.

Critical mistakes when using stop-loss and how to avoid them

Risk with limit orders

The main danger with using a limit stop-loss is that the order may not execute at all. If the price drops below your limit price very quickly, the order may remain unfilled.

Rule: If you need a guaranteed exit, use a market stop-loss. Limit orders are better for locking in profits when you have time.

Price limits and order sizes

In spot trading, there are restrictions on price deviation. For BTC/USDT, this might be 3% from the trigger price. Your order price cannot exceed these limits; otherwise, the order won’t be placed.

Also, note that maximum sizes for limit and market orders differ. If you try to place a market stop-loss larger than system limits, placement will be rejected.

Minimum trade size

After executing the main order, your position size must meet minimum requirements. If the asset value drops below this minimum, the TP/SL order may not be placed or executed.

Recommendations for effective risk management

• Always use a stop-loss: it’s insurance against catastrophic losses
• Set a take-profit in advance: don’t rely on emotions at profit time
• Monitor liquidity: high volume on the exchange ensures better execution
• Pre-set TP/SL: automate the process, don’t wait for orders to trigger
• Check price limits: ensure your order size is permitted by the system

Stop-loss is not just a tool — it’s the foundation of survival in the market. Proper use of stop-loss and take-profit separates successful traders from losing ones. They work 24/7, even while you sleep, protecting your capital and locking in profits.