A mandatory course in risk management: Master the correct use of stop-loss orders

What is the most common mistake in trading? Many people say it’s " chasing highs" or “bottom fishing,” but the more deadly issue is actually not setting a stop loss. An out-of-control losing position can wipe out all your previous profits in minutes. Today, let’s talk about SL (Stop-Loss Order), this trader’s protective shield.

What exactly is a stop-loss order?

Simply put, an SL is an automatically triggered sell order. When the asset price drops to your set level, the system will automatically close your position. For example, you buy at $100, set an SL at $90, and if the price really drops to $90, the position is automatically closed, locking in a $10 loss. The purpose of this is only one: to prevent losses from expanding infinitely.

Three common types of stop-loss strategies

Traders usually choose from three different SL strategies based on market conditions.

Fixed stop-loss is the most basic. You set a specific price, for example, trigger a sell when the price drops 10% from your buy-in. This method is straightforward but can be swept out by short-term market fluctuations.

Trailing stop-loss automatically adjusts as the price rises. For example, you set a distance of 5% from the current high, and as the price moves higher, the stop-loss point moves up accordingly, but never down. This helps lock in profits while allowing the market to continue developing.

Relative stop-loss adjusts dynamically based on market volatility. During high volatility periods, the SL distance widens; during low volatility, it tightens. This requires more active management but can adapt to different market environments.

Is SL really effective? Advantages and limitations

The advantages of stop-loss are obvious. It enforces discipline, preventing you from holding onto losing trades. Setting an acceptable risk level (for example, losing no more than 5% per trade) helps protect your capital across multiple trades. More importantly, psychologically, it acts as insurance, allowing you to think more rationally about your strategy instead of being driven by emotions.

But SL is not a magic bullet. Rapid rebounds can cause you to be stopped out at the bottom, only to see the price bounce back up. Frequent adjustments to SL can increase trading costs and lead to over-optimization traps. Also, in extreme market conditions, SL slippage can be severe, and the actual execution price may differ significantly from the set level.

How to combine strategies for maximum effectiveness?

When designing SL strategies, don’t just look at the price itself. Support and resistance levels are good references. If you’re long, place your SL just below the nearest support level—this avoids being stopped out by minor pullbacks, but still allows for timely stop-loss if a key level breaks.

Using other indicators can also improve effectiveness. For example, using moving averages to determine trend direction, and actively adjusting SL when trend reversal signals appear; or using volatility indicators (like ATR) to dynamically calculate SL distance. Some experts also set SL based on trading timeframes—daily charts allow wider SL than minute charts.

Cautionary tale: why some SLs are useless?

Common mistakes include setting SL too tight—being stopped out by small fluctuations. Also, psychologically reluctant to take losses—watching floating losses and thinking “wait a bit, hold on,” only to turn small losses into huge ones. The biggest trap is constantly moving SL upward—which was meant to be a defensive tool but becomes a “chasing the market” tool instead.

Take Profit: the other half of risk management

After discussing SL, let’s mention its “twin brother”—TP (Take-Profit Order). TP is the opposite logic: when the price reaches your expected profit level, it automatically closes the position. SL protects against downside risk, TP secures upside gains. Combining both creates a complete risk management framework.

Final reminder

Futures trading is extremely risky. Leverage amplifies not only profits but also losses. No perfect SL setup can guarantee absolute safety; only reasonable expectations and strict discipline can help you survive longer. Before each trade, ask yourself three questions: How much am I willing to lose? Where is my SL? Is this trade’s risk-reward ratio worth it?

When you start thinking about every trade with the mindset of SL, you have already surpassed 90% of retail traders.