A stop loss is a type of order that will automatically trigger when the price of an asset reaches a defined level in order to limit a loss.

In a long trade, a stop loss is set at a price below the entry price to prevent the trader from losing too much capital if the trade goes against him. For example, you buy ETH at $200, and you set a stop loss to trigger a sell if the price drops to $190, limiting your losses to 5%. Without a stop loss you could lose far more than that 5%.

A stop loss is created with either a "stop limit" or a "stop market" order. A stop market will close the trade at whatever price the market is offering. A stop limit will close the trade but no lower than at a different specific price. For example, if you set a stop loss at $190, and put a limit at $185, it will trigger the sell at $190, but won't sell if the best price it can get is lower than $185.

The counterpart of a stop loss is a take profit.

Stop losses are critical to protecting your capital when the trade goes the opposite direction you intended. They allow a trader to keep tfrom losing large amounts of money. They also allow a trader to set a stop loss and not worry about checking their account as they can rest assured their losses are capped.

Setting the right level for a stop loss is key. Setting a stop too close to your entry price and you don't give the price enough room to fluctuate. The price could momentarily dip down, triggering your stop loss and closing your trade, before shooting for the moon.

Setting it too far away however, and you just increase the loss you take when it goes against you. It's a delicate blance.

It's also standard practice to move up the stop loss as the trade goes with you. Say you buy at $200, you set a stop loss at $190, and then the price shoots up to $250. At this point you should increase the stop loss to above $200 so you can "lock in" some profits in case it reverses. That way in the worse case, you only make some money instead of losing some money. A good way to automate that is with a trailing stop.