What is Stop Limit? How to place stop limit orders for newbies

What is Stop Limit?

Stop Limit is a type of combined command Stop Order and Limit Order. In other words, it allows you to set a price at which your limit order will be triggered. This helps users control the price at which they want to buy or sell assets, instead of letting orders execute automatically at the market price.

Basic structure of a Stop Limit order:

• Stop Price: This is the price at which, when the market price reaches or surpasses, the limit order will be triggered.
• Limit Price: This is the price at which you want to buy or sell the asset. The order is only executed if the market price is within this limit range after the order is activated.

The stop limit order will not be executed immediately but only when the market price reaches the stop price. At that time, the limit order will be placed in the order book, and only when the price matches the limit price you set will the order be executed.

Let’s say you are holding Bitcoin and want to sell it if the price starts to drop. The current price of Bitcoin is $30,000 and you decide that if the price drops below $28,000, you will sell to limit your losses. However, you don’t want to sell too low and want to sell at $27,500 or higher. You can then place a Stop Limit order with:

• Stop Price: 28,000 USD
• Limit Price: 27,500 USD

If the market price falls to 28,000 USD, your limit order will be activated, and if the price continues to fall to or below 27,500 USD, the order will be executed.

If the market price drops rapidly and passes 27,500 USD, your order will not be filled, which will prevent you from selling at too low a price. The order will remain in effect until you cancel.

Difference between Stop Limit and Stop Loss

One of the things that many investors confuse is between orders Stop Limit and command Stop Loss.

• Stop Loss Order: When the price reaches the stop price, the sell order will be executed immediately at the current market price, regardless of whether the price may be lower than your expected level.
  • The purpose of the order is to protect assets against rapid fluctuations and not want to risk the market price continuing to decline sharply.
  • This order is suitable in situations where the market moves unpredictably and you want to minimize losses immediately.
• Stop Limit Order: When the price reaches the stop price, a limit order will be created, executing only if the price is within the range you set.
  • An order is suitable when you want to control the transaction price, do not want to sell the asset at a price that is too low or buy at a price that is too high.
  • This order is useful in situations where the market is highly volatile and you want to ensure order execution within a certain price range.

The biggest difference is that a stop loss order will ensure that your order will be filled, but possibly at a lower price than expected. Meanwhile, a stop limit order allows you to control the selling price but does not guarantee that the order will be executed if the price fluctuates too quickly.

Learn more: How to place Stop Loss orders on crypto exchanges.

How to set up a Stop Limit order on the trading platform

Determine your trading strategy

Before setting up a stop limit order, you need to have a clear strategy. You need to ask yourself, do you want to protect capital or optimize profits? What are your goals and what is your risk tolerance?

Determine stop price and limit price

Once you have a strategy, you need to determine two main factors:

• Stop Price: This is the price at which, when the market price is reached, your order will be activated. The stop price should be set based on technical analysis or a price at which you feel safe to exit the trade.
• Limit Price: This is the price at which you feel comfortable trading. This price may be slightly lower than the stop price but should not be too different to ensure your order is executed.

Place an order on the exchange

The steps for placing a stop limit order may vary between exchanges, but in general you need to do the following:

1. Select the Stop Limit order type on the trading interface.
2. Enter Stop price and Price limit that you have identified.
3. Confirm the trading volume (amount of coins you want to buy or sell).
4. Place orders and monitor the execution process.

Monitor and adjust orders

Even if you have set a stop limit order, it is important to monitor and adjust the order when necessary. The crypto market can change rapidly, and if market conditions change, you may need to readjust your orders to suit the new situation.

Note when using stop-limit orders

Stop price and limit price may not be matched

In cases where prices fluctuate too quickly, especially in the crypto market, your stop limit order may not be filled if the market price is not within the limit price range. This can cause you to not exit the position as desired.

This is also a disadvantage of this type of order. Therefore, users must not be subjective when placing an order but must still closely follow and update market news.

Set a reasonable stop price

The stop price should not be too close to the current market price, as this can trigger the order unnecessarily when the market has only minor fluctuations. At the same time, you should not set the stop price too far because it will put you at risk of losing more profits when the market drops.

A reasonable stop price is usually between 2% and 10% of the current market price, depending on the asset’s volatility and your trading strategy.

Some factors to consider when setting a stop price:

1/ Asset volatility (Volatility): Crypto tends to fluctuate strongly in the short term. Many investors set stop prices below support level or above resistance level. This ensures that the order is only triggered when the price crosses a key threshold, signaling a change in trend.

Or you can use the tool Average True Range (ATR) helps estimate average volatility. If a coin’s ATR is 4%, you can set the stop price at least far away 4% to 6% current price to avoid orders being triggered by short-term fluctuations.

2/ Trading time frame: If you are a trader short term (day trader or swing trader), you can accept smaller intraday fluctuations, so stop prices can be set closer than for long-term investors.

If you are an investor long termyou should set a far stop price according to the weekly/monthly frame because you want to avoid being affected by small short-term fluctuations and only actually activate the order when the market has a long-term downtrend.

3/ Level of risk tolerance: You need to determine in advance the level of loss you can accept. The stop price can be set based on the percentage from the current price that you are willing to lose. Risk-return ratio popular is 1:2 or 1:3meaning you are willing to lose 1 part of the profit to gain 2 or 3 parts of the profit.

If you buy Bitcoin for 30,000 USD and your profit target is 35,000 USD (5,000 USD increase), the stop price can be set at 28,000 USD, allowing you to lose a maximum of 2,000 USD (1:2 ratio). .

Do not rely too much on Stop Limit orders

The stop limit order is very useful, but it is not an absolute solution. You should combine it with other risk management methods such as diversifying your investment portfolio, following market news and using technical analysis tools.

Learn more: How to choose a time frame to optimize Crypto trading.