What are stop orders and how do you use them?

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2 years ago

Whether you're an amateur or professional crypto trader, one tool you cannot do without is the stop-loss orders.

In this post, we will be looking at what stop orders are, the types of stop orders available, how and when to use stop orders, among other related things.

So without much ado, let's get started.

What are stop orders?

Stop orders are orders placed to buy or sell a particular cryptocurrency when it moves past a specified price.

This specified price is known as the stop price.

The stop price is usually above or below the current market price, depending on whether you're selling or buying. If you're buying, it's called a buy stop-order, and If you're selling it becomes a sell stop-order.

And once the coin or token reaches this price, an order to buy or sell at the current market price will be placed and filled accordingly.

Stop orders can also be referred to as stop-loss orders.

Stop-loss orders are risk management tools traders use to lock-in profits or mitigate potential losses beyond predetermined levels in order to protect their capital.

Types of stop orders

There're basically 3 popular types of stop orders. All of them are usually available on futures trading platforms like BitMex, KuCoin futures, and Binance futures.

These are:

  • Stop limit order

  • Stop market order

  • Trailing stop orders

1. Stop limit orders

Stop limit orders are orders that combines the features of stop orders with limit orders.

Stop orders as already discussed are orders to buy and sell a particular cryptocurrency at the current market price once it reaches a specified price.

Limit orders, on the other hand, are orders to buy or sell and particular cryptocurrency at a specific (fixed).

Stop limit orders, therefore, are orders to sell or buy a particular asset at a specific price or better once it touches a certain price.

So there're two prices to be set in a stop-limit order:

  1. The stop price

  2. The limit price

For example, BCH is pumping and I want to sell it at $2,000 or more.

My stop-limit price will look like:

Stop: $2,050

Limit: $2,000

This means that once the price of BCH reaches $2,050 a limit order to sell will be placed at a price of $2,000 or higher (any amount between $2,000 and $2,050).

2. Stop-market order

A stop market order is the same as a stop-loss order.

And the way it works is as described above.

Let's use the same example of our 1 BCH above. I am willing to ride the coin to the moon and beyond if possible.

But I know how crazy the market can get and a dump is always lurking around the corner.

Therefore, I decided to protect my capital or lock-in some gains already made by setting a stop-market order.

I want to sell my BCH at the current market price if the price touches $1,855.

So whenever the price of BCH goes down to $1,855, my coins will be sold at the best current market price.

Whatever that current market price is, you don't know, as it is based on the level of volatility.

It could be at the exact $1,855. It could be slightly or significantly lower or higher, you can't tell.

It's all based on how fast the market price is moving at that time.

3. Trailing stop orders

A trailing stop order is an order to buy or sell a particular cryptocurrency when the price moves below or above a specified percentage or dollar amount of the current market price.

This is usually used when you expect the coin to keep pumping or dumping depending on whether you're buying or selling.

So that there's no upper limit to the amount of profit you can make or you want to buy the coin as close to the bottom as possible.

Also, people (like me) use trailing stop orders to avoid having to keep changing my stop-loss orders manually based on market movements.

With trailing stop order, your buy or sell price will keep changing based on the price movement.

For example, using the sample BCH example above.

I bought my 1 BCH at $500. And now, the current market price is $1,500.

I am confident that the price will keep rising, but at the same time, I don't want to lose the profit I have already made on my investment.

Therefore, I decided to set a trailing stop sell order of 10% or $150. And 1,500 is my initial sell (or stop) price.

Yes, you can either set a specific dollar amount or percentage.

For the purpose of this article, I will use a percentage trailing stop order sample.

That means that I want the system to sell my coins at if the price drops by 10% from $1,500.

But if the price of BCH keeps rising, let's say it goes to $1,700 the system will set my new stop price at 10% below $1,700 which is 1,530.

If the price increase is below 10% a new stop price cannot be set because once a stop price is set, it cannot go below that without you having to manually cancel and set a new trailing stop order.

So if the price keeps rising to let's say $3,000 and assuming your order has not been cancelled or executed before then, the system will set your new stop price at 10% below $3,000 which will be $2,700.

If at any time in the coin's price movement it falls 10% below its new stop price of say, the above $2,700 the coin will be sold automatically at the best current price.

The same logic applies to when you're selling.

Which stop order type do you use more frequently? How has it been working for you? Share with us in the comments section below.

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