Stop-loss and take-profit: how to manage risks in the spot market

Successful trading in the cryptocurrency market requires not only the ability to select profitable assets but also risk management skills. A stop-loss is one of the most effective tools for limiting potential losses in unfavorable market conditions. Simultaneously, a take-profit order automatically locks in profits, freeing traders from the need to constantly monitor the market.

Why is a stop-loss a critically important tool

A stop-loss is not just a condition for automatic selling — it’s a psychological and financial anchor that protects the trader’s capital. In volatile markets, prices can sharply reverse against a position, and without a stop-loss, losses can quickly accumulate. Conversely, a take-profit works in the opposite direction, locking in gains when the target price is reached.

Key differences: stop-loss, take-profit, OCO order, and conditional order

While all these tools serve risk management purposes, they operate differently, especially when it comes to locking funds.

How a stop-loss works in practice

Placing a stop-loss order from the trading window

When creating a stop-loss order, the trader must specify three key parameters:

• Trigger price — the level at which the order activates
• Execution price — the price at which the trade will be executed (not required for market orders)
• Position size — the volume of assets to sell

Once the current price reaches the trigger level, the order activates automatically.

Two modes of stop-loss execution

Market stop-loss order: executes at the best available price at the moment of activation. It is filled instantly, following the IOC (Immediate or Cancel) principle — any portion of the order that cannot be filled due to insufficient liquidity is automatically canceled.

Limit stop-loss order: enters the order book and waits for execution at the specified price. If at the time of trigger the best bid is above the order price, execution occurs immediately. Otherwise, the order remains pending until the market reaches the desired price.

Example of stop-loss operation

Scenario 1: Market sell stop-loss

Current BTC price: 20,000 USDT

Order parameters:

• Trigger price: 19,000 USDT
• Mode: Market order

Result: When BTC drops to 19,000 USDT, the order triggers and the position is sold at the best available price at that moment.

Scenario 2: Limit stop-loss

Current BTC price: 20,000 USDT

Order parameters:

• Trigger price: 19,000 USDT
• Execution price: 18,800 USDT

Result: When the trigger is reached, the limit order enters the order book and waits until the price drops to 18,800 USDT or lower.

Linking a stop-loss to the main order

Advanced traders often place a stop-loss and take-profit simultaneously with the main limit order. This approach works on the principle of OCO orders — when the main order is executed, both protective orders are automatically activated. If one (e.g., stop-loss) triggers, the other (take-profit) is automatically canceled.

Practical example of combined use:

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

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

If the price rises to 50,000 USDT, the take-profit triggers, and the stop-loss is automatically canceled. If the price falls to 30,000 USDT, the stop-loss triggers, closing the position at market price, and the take-profit is canceled.

Critical limitations and risks

Risk of unfilled limit stop-loss

Limit orders may not execute if the market “breaks through” the set level too quickly. For example, if the stop-loss is placed at 19,000 USDT but the price drops to 18,500 USDT without stopping, the limit order remains unfilled. In this case, a market stop-loss would be more reliable, as it guarantees execution regardless of the speed of price decline.

Price range restrictions

Each trading pair has maximum allowed price deviation limits. For example, for BTC/USDT, this might be ±3%. This means the execution price of your stop-loss cannot significantly differ from the trigger price, reducing the risk of unexpected execution during extreme volatility.

Minimum order size requirements

After executing the main buy/sell order, the resulting position size must meet the platform’s minimum requirements. If the remaining asset value is below the minimum allowed volume, the stop-loss may be rejected or not executed.

Different maximum limits for order types

The maximum size of a market order is often lower than that of a limit order. If you try to place a limit order for 1 BTC with a market stop-loss, but the maximum for market orders is only 0.5 BTC, the operation will be rejected.

Triggering upon activation

When using linked TP and SL with a limit main order, remember: if the take-profit (limit order) triggers, the stop-loss will be canceled even if the limit take-profit has not yet been filled. In case of a price rebound, this could leave you unprotected at a critical moment.

Practical tips for effective use

1. Prefer market stop-losses in high volatility conditions — they guarantee execution, though possibly at a worse price than expected.

2. Use limit stop-loss orders in stable markets — this helps avoid excessive losses during small price fluctuations.

3. Place stop-loss and take-profit orders simultaneously — this provides psychological comfort and protects against emotional decisions.

4. Check platform restrictions before placing orders — each pair has its own rules for price, volume, and margin.

5. Remember liquidity — limit orders may not fill if there are insufficient counterparties at the desired price.

A stop-loss is not insurance against all losses but a discipline tool that helps traders stick to their plan and protect their capital from catastrophic losses. Proper use of stop-loss combined with take-profit is key to long-term success in cryptocurrency markets.