Stop-loss order

Think of it as a tripwire rather than a safety net. The trigger is a promise the exchange keeps; the price you receive after it fires is not, because the resulting sell takes whatever the book offers. In a fast market those two things can be very far apart.

How it works

A stop-loss has two prices, and confusing them is the classic mistake.

The stop price is the trigger. Nothing is in the book while the market sits above it, and other traders cannot see it. When the market prints at or through that level, the order activates. What it activates into depends on the type. A stop-market becomes a plain market order and sells at the best available prices until it is filled, whatever those turn out to be. A stop-limit becomes a limit order at a second price you specify, which protects you from a terrible fill and, in a crash, may simply never fill at all.

That is the whole trade-off. Stop-market guarantees you exit and not the price. Stop-limit guarantees the price and not the exit. There is no third option that gives you both, and any product that appears to is charging you for it somewhere.

Exchanges differ on the fine print in ways worth checking: whether the trigger uses the last trade, the mid price, or an index of several venues, whether the order survives a maintenance window, and whether it counts as a taker order when it fires. Most do.

Where you see it

Stop-losses come from active trading, and they behave badly during exactly the events people buy them for.

The clearest demonstration on record happened on GDAX, now Coinbase, on June 21, 2017. A single 12.5 million dollar market sell of 39,300 ether hit the book and walked it down 29.4 percent, from 317.81 dollars to 224.48. That drop tripped roughly 800 resting stop-loss orders and margin liquidations, each of which became another market sell into an already empty book, and the cascade printed trades as low as 0.10 dollars. Prices recovered to around 300 dollars within 10 seconds. Every one of those stops did precisely what it was configured to do, and their owners were sold out at the bottom of a ten second hole. Coinbase later reimbursed affected customers from company funds, which was a discretionary act of goodwill, not a right anyone held.

For someone accumulating bitcoin over years, this order type deserves scepticism for three reasons. It converts volatility, which is normal for bitcoin, into a permanent realized loss. It creates a taxable disposal at a moment you did not choose. And it only works on coins held at an exchange, which is the place a long term holder should be leaving.

It has real uses: leveraged positions, short term trades with a defined thesis, and situations where a specific loss would genuinely hurt. Those are trading problems. If your plan is to buy and hold, the tool that protects you is self-custody, not a resting sell order at a round number below the market.

Stop-loss order vs market order

A stop-loss order is a market order with a delay switch attached. The plain market order executes the moment you send it, against the depth you can see on the screen. The stop-market order executes later, against depth nobody can predict, at whatever moment the market crosses your trigger, which by definition is a moment of falling prices and thinning liquidity. Same execution mechanics, opposite conditions: one runs when you choose, the other runs when the market chooses for you.