How a stop-loss order works
The order waits outside the order book, held by the exchange and unseen by other traders. A holder of an asset places a sell stop below the market, and a short seller places a buy stop above it. When the reference price touches the stop price, the order is released, and what is released depends on the type:
- Stop-market: becomes a market order and fills at the best prices available
- Stop-limit: becomes a limit order at a set price, which may not fill at all
- Trailing stop: the trigger follows the market at a set distance and never moves back
- Take-profit: the mirror image, triggered when the price moves in the trader's favour
What an exchange decides when offering stop orders
The first decision is the reference price: the last traded price, the best bid or ask, or a mark price drawn from several markets. A last-price trigger is the simplest, and a single odd trade can set it off.
The second is cover. Funds or assets for a stop order are usually placed on hold when the order is accepted, so that the order cannot fail for lack of balance when triggered.
Many stops clustered at one level can turn a dip into a slide, because each triggered order sells into a falling market. Price bands on the resulting market orders limit the damage.
Stop-loss, limit order or liquidation?
- Limit order
- Rests in the book and fills at its price or better. A sell limit sits above the market, a sell stop below it.
- Liquidation
- Forced by the platform when the collateral behind a leveraged position runs short. A stop-loss is the trader's own choice, set earlier.
Where a stop-loss order shows up in a platform
Modules that do the work
- Matching engineA low-latency order book for spot markets, with market makers and outside liquidity.
- Market dataLive and historical prices for crypto, stocks and FX, from the data vendors you choose.
- LedgerThe double-entry book of record behind every balance, fee and transfer.