In futures trading, stop-losses are one of the most frequently discussed—and most frequently overlooked—parts. Many people know they should set a stop-loss, but aren’t clear on the difference between a market stop-loss and a limit stop-loss, or which price they should use as the trigger.
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■ How do conditional orders work?
Stop-loss and take-profit orders are both conditional orders: they don’t enter the order book or execute until the price reaches the specified trigger price. Once triggered, the system submits the order according to the method you set in advance.
On Binance USDⓈ-M futures, you can choose whether the trigger condition is based on the last price or the mark price. The last price reacts faster, while the mark price is less likely to be falsely triggered by a sudden wick in a single market.
■ Stop-Market and Stop-Limit Orders
A stop-market order is filled at the market price once triggered. It is more likely to be filled, but in volatile markets, significant slippage may occur, meaning the actual fill price can differ considerably from the trigger price.
A stop-limit order places a limit order once triggered. The fill price will be no worse than the limit price you set. The trade-off is that if the price jumps straight past your limit, the order may remain unfilled, rendering the stop ineffective.
■ Where to Place a Stop-Loss
A common approach is to place the stop-loss at a price level that would show your trade thesis is no longer valid, then work backward from the stop distance to determine your position size—instead of choosing a position size first and then picking an arbitrary price level you can afford to lose at.
If the stop-loss is too close to your entry price, normal price fluctuations may trigger it. If it is too far away, the loss on a single trade may be too large. The way to balance the two is to adjust your position size, not to keep moving your stop-loss.
■ A Few Practical Habits
Set your stop-loss as soon as you open a position; don't wait until your floating loss has grown. In one-way position mode, you can select “reduce-only” when placing take-profit and stop-loss orders to prevent a conditional order from opening a new position in the opposite direction after your position has already been closed.
Once you've set a stop-loss, don't move it farther away just because it's about to be triggered. Being stopped out now and then is a normal cost of trading. Letting a small loss turn into a big one is what you should avoid.
■ In a Nutshell
The point of take-profit and stop-loss orders isn't to get every trade right; it's to limit your losses to a level you've decided on in advance when you're wrong. When prices are moving sharply, avoid chasing trades—wait for the market to settle before reassessing.
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