A stop-loss order is an instruction to sell an asset automatically once its price falls to a level you choose, the "stop price". It is meant to cap the loss on a position without you watching the screen. The catch is that a standard stop order only guarantees that a sale starts at the stop price, not that it happens at that price. FINRA, the US broker-dealer regulator, says a triggered stop becomes a market order, and "the price you receive upon execution, though, could be markedly different than your stop price" (FINRA, 26 March 2025).
How a stop-loss order works
FINRA defines a stop order as "an order to buy or sell a security once the price of the security reaches a specified price." Once the stop price is reached, "the order automatically turns into a market order and is executed as soon as possible at the current market price."
The order works in two steps:
- Trigger. The market trades at or through your stop price.
- Execution. Your order becomes a market order and fills against whatever bids are available at that moment.
A sell stop limits losses or protects gains on an asset you hold. A buy stop does the same for a short position: it buys back if the price rises to your threshold.
A worked example
Say you buy 1 BTC at US$41,000 and place a sell stop 10% lower, at US$36,900. If the price falls to US$36,900, your order becomes a market order and sells.
If the market moves in an orderly way, the fill lands close to US$36,900, a loss of about US$4,100 before fees. If the price drops sharply through the stop, the fill can come well below it, and the loss will be larger than 10%. The stop price is a trigger, not a floor.
The three main types
Stop order (stop-market)
This is the basic version described above. The order is very likely to fill once it triggers. The price you get is not guaranteed.
Stop-limit order
FINRA explains that in a stop-limit order, "your stop order is designed to trigger the activation of a limit order." Once the stop price is reached, the order fills only at your limit price or better.
The SEC's investor bulletin on these orders gives this example: a sell stop-limit with a stop of US$3.00 and a limit of US$2.50 becomes active if the price reaches US$3.00, but "can only be executed at a price of $2.50 or better." The trade-off is the reverse of a stop-market order. You control the price, but if the market falls straight past your limit, the order may not fill at all and you keep the falling position. FINRA suggests a stop-limit may suit investors whose main goal is a specific price rather than a certain exit.
Trailing stop order
A trailing stop sets the stop a fixed percentage or dollar amount away from the market price. FINRA describes it as an order to sell "if your stock declines a certain percentage or dollar amount from its market price at the moment." When the price moves in your favour, the stop follows it. When the price moves against you, the stop stays where it is.
The SEC bulletin uses this example. You buy at US$20 with a US$1 trailing amount, so the stop starts at US$19. The price peaks at US$24, which lifts the stop to US$23. When the price falls back, the stop stays at US$23, and the shares are sold when the price reaches US$23, "though the execution price may deviate from $23."
A trailing stop that has not been converted to a stop-limit is still a market order once triggered. It carries the same fill-price risk as a basic stop.
How much can a stop-loss actually lose?
Enter your entry price, your stop price, how far the fill might land below the stop and your position size to see the loss before fees.
| Price you bought at | Your stop price | How far the fill lands below the stop | Position size | Loss before fees (a negative number is a protected gain) |
|---|---|---|---|---|
| 41,000 US$ | 36,900 US$ | 0 US$ | 1 units | 4,100 US$ |
| 20 US$ | 23 US$ | 0 US$ | 1 units | -3 US$ |
| 41,000 US$ | 36,900 US$ | 4,100 US$ | 1 units | 8,200 US$ |
- All values are your own inputs; the default row repeats the article's hypothetical 1 BTC bought at US$41,000 with a stop at US$36,900, a loss of about US$4,100 before fees.
- The first worked example follows the article's trailing-stop case: bought at US$20, stop lifted to US$23, so a fill at the stop locks in a gain.
- The fall past the stop is a guess you supply: the stop price is a trigger, not a floor, and no one can know the fill in advance.
This is arithmetic on your inputs only: it leaves out fees and tax, cannot predict how far below the stop a fill will land, and does not cover stop-limit orders that may not fill at all.
Risks to understand before relying on a stop
Gaps and fast markets. FINRA Regulatory Notice 16-19 (26 May 2016) warns that a sell stop triggered during a steep decline "is more likely to result in an execution well below the stop price."
Short, sharp moves. FINRA notes that "rapid price movement during a short period of time could trigger a stop order." The price may then recover, but your sale has already happened and cannot be undone.
Stops can feed a sell-off. The same 2016 notice says the activation of sell stop orders "may add downward price pressure on a security" and "may exacerbate price declines during times of extreme volatility." When many stops sit near the same level, triggering them can push the price further down.
Rules differ by venue. FINRA notes that some securities exchanges have stopped accepting stop orders, although brokerage firms may still offer them. The SEC bulletin adds that firms differ on whether a stop triggers on the last trade price or on quotes, and that not every firm offers all three order types. Before you rely on a stop, check your platform's documentation for what triggers the order, how long it stays active and whether it can fill outside normal conditions.
Choosing between them
| Order type | Becomes after trigger | Fill likely? | Price controlled? |
|---|---|---|---|
| Stop (stop-market) | Market order | Usually | No |
| Stop-limit | Limit order | Not guaranteed | Yes, limit or better |
| Trailing stop | Market order (unless set as trailing stop-limit) | Usually | No |
None of these orders removes market risk. Each one gives up something: either certainty of price or certainty of exit.
Limitations: the definitions and risk warnings here come from US securities regulators (the SEC and FINRA) and describe stock markets. Crypto platforms set their own trigger and execution rules, so check them before use.
