Stop loss orders vs stop limit orders and how to use them



If you are a beginner trader, you cannot avoid the concepts of stop-loss and stop-limit orders. It is important to know that they are not the same thing. Both orders are necessary for the automatic sale of the asset in case of a price fall. This way it is possible to reduce the risks if the prices go down. But these two orders work differently, which means they can lead to different results, sometimes negative, if used incorrectly. Let's take a closer look at each of them so you can understand in detail what a stop loss versus stop limit order means.


What is a stop market sell order?

Now we will explain which of the following is a characteristic of a stop-loss order. 

Let's imagine that you are trading on a cryptocurrency exchange. You are constantly monitoring the market, analyzing the latest trends and news and deciding when and how to buy and sell. Your goal is to maximize profits and achieve your financial aims while managing risk and maintaining trading discipline.

However, even with this kind of responsible approach, something can go wrong. For example, you were expecting the price of your chosen asset to rise, but it is falling and getting lower and lower. Of course, this jeopardizes your profits, and can even result in a financial loss. That's why you need a stop loss. 

A stop loss is a type of order you place to sell a coin when it reaches a certain price. It is a way to reduce potential losses if the market moves against you. For example, if you buy a coin at $100 and place a stop loss order at $95, the trade will automatically execute if the coin's price falls to $95 or lower. This will help you avoid large losses if the market moves in the wrong direction. Stop loss orders are commonly used by traders to manage risk and protect their money. 

A stop loss ensures an investor from losing too much money. It is considered to be very dangerous to trade in the market without using a stop loss.

A stop-loss is also useful when an investor has no time to continuously sit in front of a monitor and watch price movements. It will also help reduce losses in the event of force majeure, such as a power outage or stock market malfunctions.

Finally, a stop-loss can save you money if the investor has misjudged the situation during the trading process. For example, if he thought that the downward price trend would end soon, but his expectations did not come true, the price continues to fall.

There are two types of stop-loss orders.

  1. Fixed.
  2. Trailing.

The fixed order assumes placing it at a certain level without its further automatic moving after the price. You can rearrange the order in the manual mode, moving it to the no-loss level, but there will be no automatic sliding after the price, as in the next option.

The trailing stop tends to follow the price at a given distance set by the trader. 

The essence of trailing stop is that the order is automatically moved after the price when it moves towards profit. When the price turns back, the stop loss remains in its place and if it reaches it, the position is closed automatically.

It is advisable to place a trailing stop on strong price movements when it is difficult to predict the price drop. Often, traders use these two types of stop orders simultaneously. 

What is a stop-limit order? 

This concept is more complicated than the previous one but is very meaningful because understanding stop vs stop limit orders is key to our topic. 

Before we figure it out, we should understand what a limit order is. 

A limit order is the creation of an order to buy or sell a cryptocurrency when the price reaches a certain level. Such an order necessarily includes two parameters:

  • The price at which the trader wants to make a buy or sell transaction. 
  • The planned volume of the transaction.

In other words, while a market order is a purchase (or sell) of a cryptocurrency at the current market price, a limit order is a buy or sell of a cryptocurrency at a price that is better or equal to the stop price. Such orders are useful if you have a target entry or exit price and are willing to wait for your conditions to be met.

The stop limit order has two orders, and you have to set two prices:

  • Stop price. This level will enable a limit order, which will be executed only if the price touches the limit price set by the trader. Otherwise, the order will never be executed.
  • The limit price is the second price that the trader must set for the stop-limit order. Once the stop price activates the limit order, it will be executed if the cryptocurrency touches it.

Consider an investor who is long 100 coins, and has entered a stop-sell order with a stop price of $50, and a stop limit price of $48.50. If coins decline to the stop price of $50, the 100 coins will be sold as long as a minimum price of $48.50 can be obtained. If the price has dropped sharply, and a sell order cannot be executed at $48.50 or higher, the 100 coins will remain unsold.

Simply put, the stop limit is a risk management tool that gives traders more control over the price at which the order should execute. This order can work well in volatile markets, so it is very relevant for cryptocurrency traders.

Stop order vs stop limit

Stop loss and stop limit orders are similar because one of their purposes is to protect open positions and keep traders from losing money.

What is the difference between stop loss and stop limit? The difference between them appears when the price reaches the stop order level. In the case of a stop loss, when that happens the position is closed automatically by current market price. The bad news is that the position may not necessarily close at the price specified in the stop loss, which can happen during small liquidity.

In the case of a stop limit order, when the price touches the stop, only the limit order is triggered, which is executed only when the price equals or is better than the limit price.

In other words, the difference between the limit order and the stop order is as follows. A stop limit order gives traders more control over their positions relative to the price which will trigger an exit. But stop-losses are easier to use and can also reduce your losses.

Advantages and disadvantages of using stop loss and stop limit orders

Like any trading strategy and trading tools, stop loss and stop limit orders have advantages and disadvantages. 


Aside from the obvious benefit of reducing risk, stop loss and stop limit orders have one more equally important benefit. It automates your trading process. Knowing that your money is protected from loss allows you to focus on other tasks or market analysis to find new opportunities. 

How else can you automate your work on a cryptocurrency exchange? 

The easiest and most affordable option is to use the copy trading strategy that many trading platforms offer today. The essence of copy trading is simple. You create an account on such a platform and open a list of traders who allow users to copy their deals. All you have to do is choose a professional whose trading results seem impressive to you and click "follow". All deals that are made during his trading session will be copied into your account, and you will get the same trading result as he did. 

In addition to copy trading, you can use trading robots, which will take over the automation of any trading strategy. They can work on any exchanges and can be fully automated or just give you advice on when to buy or sell this or that cryptocurrency. For example, if you want to trade the most popular cryptocurrency, bitcoin robot will do it for you. In addition, it will not make mistakes that can be due to inattention, fatigue or emotions that are inherent in almost every trader. 

We also advise both beginners and professional traders to use the TradingView platform. It's a place that has a huge number of price movement charts as well as a lot of other tools for technical analysis. In addition, tradingview automated trading will allow you to automate any strategy and create your own trading robots based on it. TradingView is also a huge social network for many traders. Here you can share your investment strategies and learn a lot of useful information - including about stop-losses. Not without reason, this platform is considered the most popular place for exchanging the experiences of traders from all over the world. 


The disadvantage is that even if you use either of the two orders, it does not mean that you are 100% protected against losses. A stop-loss order may not work quite right during sudden disruptions and price gaps, leaving you with more losses than expected. A stop-limit order may not execute at all if the price does not touch the limit price. For all the advantages of these orders in trading the cryptocurrency market, you should not rely on them entirely. 

What is the bottom line?

Now you can easily answer the question "What is stop market and stop limit?" and understand how they can help your trading. Stop loss and stop limit are different orders, with different goals and objectives. While the stop loss is designed to reduce your losses in the event of a bad trade situation, the stop limit allows you to guarantee a minimum trade price for sells, or maximum trade price for buys, if the trade executes. Before using one or another option, be sure to practice on a demo account, and understand the principle of placing orders in different cases.  Correctly placed stop-loss and stop-limit orders make trading on the cryptocurrency market easier and more profitable.

In other words, make sure you understand how it all works and choose one of the orders as your method of risk management, or use both. This will minimize losses, increase profits, and take your trading to the next level.


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