Stop-loss and take-profit orders: The Complete Guide to Spot Trading Risk Management

In spot trading, price fluctuations are unpredictable. Traders need to implement effective risk management measures to protect their funds. Take-profit orders (TP) and stop-loss orders (SL) are tools designed for this purpose. By setting these two types of orders appropriately, traders can lock in profits when the market moves favorably and cut losses promptly when the situation turns adverse.

Comparison of Four Order Types: Why Is Stop-Loss So Important?

The Gate platform offers four main types of orders, which differ significantly in how they lock funds and manage risk. Understanding these differences is crucial for developing effective trading strategies.

Take-Profit / Stop-Loss Orders (TP/SL): Once placed, your funds are immediately reserved, even if the order hasn’t been triggered yet. This means that portion of funds cannot be used for other trades temporarily.

OCO Orders (One Cancels the Other): Provide more flexible fund management. When you set an OCO order, the system only reserves margin for one side. This is especially advantageous for traders who want to set both profit targets and stop-loss points simultaneously. For a deeper understanding of how OCO orders work, see related detailed explanation.

Conditional Orders: Offer the most flexible fund usage. In these orders, your funds are not reserved before the trigger. Only when the price reaches the trigger condition does the order activate, and funds are then used. This allows traders to manage their account funds more freely.

Stop-Loss and Take-Profit Mechanisms in Spot Trading: From Trigger to Execution

The Complete Process of Setting Stop-Loss and Take-Profit Orders Directly

In Gate’s spot trading interface, you can create TP and SL orders directly from the order area. This is the most straightforward risk management method.

When placing an order, you need to input three key parameters: trigger price, order price (limit order), and order quantity. Funds are locked at the moment you place the order.

Once the last traded price reaches your trigger price, the order is activated, and the system automatically submits a market or limit order based on your settings:

Market Order Execution Logic: Market orders are executed immediately at the best available market price. The system follows IOC principles (Immediate or Cancel), meaning any portion that cannot be filled immediately will be canceled. During low liquidity or sharp price swings, some of your order may remain unfilled.

Limit Order Execution Logic: Limit orders enter the order book and wait for matching. If the best available price is better than your limit price, the order executes immediately at that better price. Otherwise, it waits in the order book until the market reaches your specified price. Traders should understand that limit order execution depends on market liquidity and subsequent price movements, and there is a risk of non-execution.

Risk Warning: Because limit orders depend on future price movements and liquidity, they may not execute as expected, especially during volatile markets.

Practical Scenario Examples

Suppose BTC is currently priced at 20,000 USDT. Let’s look at three real trading scenarios:

Scenario 1: Market Order Stop-Loss

• Trigger Price: 19,000 USDT
• Order Price: Not applicable
• Action: When BTC drops to 19,000 USDT, the system immediately sells your BTC at the best available market price, likely around 19,000 USDT.

Scenario 2: Limit Order Take-Profit

• Trigger Price: 21,000 USDT
• Order Price: 20,000 USDT
• Action: When BTC rises to 21,000 USDT, a limit buy order at 20,000 USDT enters the order book, waiting to be filled.

Scenario 3: Limit Order with Best Execution

• Trigger Price: 21,000 USDT
• Order Price: 21,000 USDT
• Action: When the price hits 21,000 USDT, if the best ask is 21,050 USDT, your order will be filled immediately at 21,050 USDT (better price). If the best ask is below 21,000 USDT, your order remains in the order book.

Advanced Use: Pre-Setting Take-Profit and Stop-Loss Orders

When placing limit orders, you can pre-set profit targets and stop-loss points. This is an advanced risk management strategy.

This approach follows the logic of OCO orders—only one side’s margin is reserved. When your main order executes, the pre-set TP and SL orders are automatically activated. Importantly, if one order is triggered, the other is immediately canceled.

You can set both orders as market orders, limit orders, or a mix. Once one is triggered, the other is automatically canceled by the system.

Special Note: For limit-based SL or TP orders, once triggered, they are immediately activated and enter the order book. Even if they are not filled, the paired order will be canceled. If the price then rebounds, your TP or SL order may not execute as intended, leaving your position unprotected.

Complete Trading Chain Example

A trader places a limit buy order at 40,000 USDT. He pre-sets the following TP and SL parameters:

1. Limit order price: 40,000 USDT
2. Quantity: 1 BTC
3. Take-profit order: trigger at 50,000 USDT, limit sell at 50,500 USDT
4. Stop-loss order: trigger at 30,000 USDT, market sell

When BTC drops to 40,000 USDT, the buy order executes, acquiring 1 BTC. At this point, TP and SL orders are activated.

Scenario A (Profit): Price rises to 50,000 USDT. The TP order triggers, placing a limit sell at 50,500 USDT in the order book. The SL order is automatically canceled. The limit order will seek to fill as the market continues to fluctuate.

Scenario B (Loss): Price drops to 30,000 USDT. The SL order triggers, and the system immediately sells 1 BTC at market price to prevent further losses. The TP order is automatically canceled.

Constraints and Precautions Traders Must Know

Price Limits and Order Parameter Rules

When setting TP or SL orders, the system enforces strict price restrictions to ensure order validity:

• For buy limit orders with attached SL and TP: the TP trigger price must be higher than the original order price; the SL trigger price must be lower.
• For sell limit orders with attached SL and TP: the TP trigger price must be lower than the original order price; the SL trigger price must be higher.

Additionally, the TP and SL prices cannot exceed the price fluctuation limits of the trading pair. For example, if BTC/USDT has a 3% fluctuation limit, a buy TP cannot be set above 103% of the trigger price, and a sell SL cannot be below 97%. To check specific trading pair limits, see Spot Trading Rules Details.

Real-World Constraints on Volume and Liquidity

Not all TP or SL orders will fully execute. The following situations may prevent orders from filling:

• If the main order’s volume or amount does not meet the minimum order requirements, related TP/SL orders may not activate.
• Different maximum quantities apply to market and limit orders. For example, the maximum for a limit order might be 1 BTC, while for a market order, it might be 0.5 BTC. If you set a limit buy for 1 BTC and try to simultaneously set a market TP order for the same amount, the system may reject the entire order because it cannot process such a large quantity as a market order.

While these restrictions may seem complex, they are designed to protect traders and maintain platform liquidity. Understanding these rules helps you better plan your stop-loss and take-profit strategies.