What is a Stop Limit Order and Stop Market Order?
Stop Limit Order is a limit order that has a limit price and a stop price. When the stop price is reached, the limit order will be placed on the order book. Once the limit price is reached, the limit order will be executed.
- Stop Price: When the asset’s price reaches the stop price, the stop limit order is executed to buy or sell the asset at the limit price or better.
- Limit Price: The selected (or potentially better) price at which the stop limit order is executed.
You can set the stop price and limit price at the same price. However, it’s recommended that the stop price for sell orders should be slightly higher than the limit price. This price difference will allow for a safety gap in price between the time the order is triggered and when it is fulfilled. You can set the stop price slightly lower than the limit price for buy orders. This will also reduce the risk of your order not being fulfilled.
Please note that after the market price reaches your limit price, your order will be executed as a limit order. If you set the stop loss limit too high or the take profit limit too low, your order may never be filled because the market price cannot reach the limit price you set.
Similar to Stop Limit orders, Stop Market orders use the Stop price to trigger the order. When the preset Stop price is reached, the Market Order will be executed immediately.
When the market has great volatility, the price rises or falls sharply, the final execution price in the Market order may be higher or lower than the nearest price at the interface that the user sees when placing the order. Users need to monitor the market depth and price fluctuations before deciding to proceed with trading.
How does a Stop Limit Order work?
The best way to understand a stop limit order is to break it into parts. The stop price acts as a trigger to place a limit order. When the market reaches the stop price, it automatically creates a limit order with a limit price.
Although the stop and limit prices can be the same, this isn’t a requirement. In fact, it would be safer for you to set the stop price (trigger price) a bit higher than the limit price for sell orders. For buy orders, you can set the stop price a bit lower than the limit price. This increases the chances of your limit order filling after it triggers.
- Buy Stop Limit
Imagine that BTC is currently at USD 30,000, and you'd like to buy when it starts to enter a bullish trend. However, you don't want to pay too much for the BTC if it quickly begins to rise, so you need to limit the price you’ll pay.
Suppose that your technical analysis tells you an uptrend might start if the market breaks above USD 30,500. You decide to use a buy stop limit order to open a position, in case the breakout happens. You set your stop price at USD 30,500 and your limit price at USD 30,600. As soon as BTC reaches USD 30,500, a limit order to buy BTC at USD 30,600 is placed. Your order might be filled with a price of 30,600 or lower. Note that USD 30,600 is your limit price, so if the market goes up too quickly above it, your order might not be filled completely.
- Sell Stop Limit
Imagine that you bought BTC at USD 28,500 and it’s now at USD 30,000. To prevent losses, you decide to use a stop-limit order to sell BTC if the price drops back to your entry. You set up a sell stop limit order with a stop price of USD 28,900 and a limit price of USD 28,500 (the price you purchased BTC at). If the price reaches USD 28,900, a limit order to sell BTC at USD 28,500 will be placed. Your order might be filled with a price of USD 28,500 or higher.
Similar to Stop Limit orders, Stop Market orders, the Stop price acts as an activation of the order. When the market reaches the Stop price, it will automatically create a market order and it will be immediately matched with the liquidity contained in the Order Book.
- Buy Stop Market
Imagine that BTC is currently at USD 30,000, and you'd like to buy when it starts to enter a bullish trend. However, you are not sure that the uptrend is sustainable, and you also do not want to miss the opportunity if the uptrend is truly sustainable.
Suppose that your technical analysis tells you an uptrend might start if the market breaks above USD 30,500. You decide to use a Stop Market order to open a position, in case the BTC price breaks through the USD 30,500 mark. You set the Stop price at USD 30,550 to ensure the BTC uptrend is sustainable. As soon as the BTC price hits USD 30,550, a market order will be executed immediately.
- Sell Stop Market
Imagine that you bought BTC at USD 28,500 and it’s now at USD 30,000. To avoid losses, you can use a Stop Market order if the price falls back to the price at which you opened the position. You set up a Stop Market order at a Stop price of USD 28,500 (the price at which you opened the position). The order will be executed if the price returns to the price at which you opened your position initially and your position will be safely closed.
Advantages and Disadvantages of using a Stop Limit Order
A stop limit order lets you customize and plan out your trades. We can't always be checking prices, especially in the 24/7 crypto market. Another advantage is that a stop limit order lets you set a suitable amount of profit to take. Without a limit, your order would be filled at whatever the market price is. Some traders prefer to hold than sell at any cost.
Stop Market orders allow you to customize and plan your trades, making it possible to set a profit level and manage risk without having to always monitor the market. In addition, Stop Market Orders also guarantee that your orders will be executed if they are triggered due to the characteristics of market orders.
Stop limit orders share the same disadvantages as limit orders, mainly because there’s no guarantee they will execute. A limit order will only start to fill when it reaches a specified price or better. However, that price may never be met. Even though you can create a gap between your limit and stop prices, the gap may not be enough sometimes. Highly volatile assets can overshoot the spread you place in your order.
Stop Market orders have the same disadvantages as market orders. Stop Market orders will incur higher trading fees because they are executed as a market order and recorded by the system as Taker.
Liquidity can also be a problem if there aren't enough takers to fill your order. Therefore, consider your position size before placing an order so that there will be no situation where you can't executed the order you want.