Stop Loss or Stop Limit Order: Which Order to Use and When

Handy Tips / 28.04.2021

Trading cryptos is not as easy as it sounds, and most people will tell you that. Even professionals require some handy tips to ensure they are profiting from the market. These tips include using order techniques to regulate the amount spent during trading. 

Using such tips, you can be sure to earn a living from trading or even become a crypto millionaire. Each executed trade requires at least two orders to be considered complete: the buy and sell orders. Other types of orders enable traders to be more specific about how they would like to trade. 

It is crucial to comprehend what stop-loss and stop-limit orders are, when and how to use them to match them to your trading objectives. This guide has everything you need to know about stop loss and stop limit captured, so read on!

Stop Loss vs. Stop Limit Overview

Stop loss and stop limit are vital and used by traders to control potential losses while trading cryptocurrencies, especially when they cannot exit the market manually. They help prevent traders from staying glued to their screens and contribute to the general peace of mind. However, it is crucial to understand that there is a subtle yet crucial difference between the duo. 

It may help to think of different orders as special tools suited for different purposes. Whether you buy or sell, it’s crucial to figure out your primary goal – to control a trade price or have an order filled promptly at prevailing market prices.

Stop Limit Order – Execute Trades Once the Price is Right

A stop-limit order is a means used by traders to reduce the risk of loss through the specification of the highest and/or lowest price of cryptocurrencies they are willing to accept. They are orders to purchase/sell at a specified price. Stop limit orders are a great tool of control for investors by specifying maximum or minimum prices for every order.

As soon as the price of cryptocurrencies reaches the set stop price, a limit order is triggered. Losses are limited by defining a point whereby a trader is unwilling to incur more losses. However, it does not promise that it will execute an order if the cryptocurrency fails to reach the defined price.

Depending on prevailing market movements and/or where investors set the price, stop-limit orders may or may not get executed. They are often used when traders would like to get the best possible market price to maximize profits and are usually worth the risk of not getting executed. 

Stop Loss Order

Stop-loss orders help lower risk exposure and limit losses if the market moves against the predictions of a trader. Simply put, they instruct brokers to close a loss-making trade at specified price levels. They are akin to market orders – because they are orders to buy or sell cryptocurrencies at the best prevailing price. 

However, these orders are only filled if the market gets to a certain price. Investors key in orders to exit a trade if prices move towards a specified loss level during the trade. Traders also use stop-loss orders to capture certain amounts of profits during trades. 

For instance, if a trader buys coins at $5 and the price moves to $10, they may opt to set the stop-loss order at $7, in this case locking $2 in profit in case price levels start to fall.

Note: for sellers, the stop loss order has to be placed below the current price, whereas for buyers, stop it should place loss above the current price. Traders need to take adequate measures to safeguard their trades against huge losses.

How and When to Use Each

There is no universal size suitable for both when it comes to applying stop-loss or stop-limit techniques. Stop-loss and stop-limit may serve the same purpose, but the impact is different for short-term and long-term investors.

Short-Term Traders

These are mainly intra-day traders, and their common characteristic is that they often cut their losses moderately faster. They aim at the relatively volatile contracts; hence they prefer using sell-stop orders as their preferred strategy. Short-term traders also have minimal interest in medium-term contract recoveries; thus, even a quick sale lower than their first stop-loss limit would be acceptable.

Long-term Traders

Long-term traders often take a long-term approach while trading. Consequently, they opt to use the stop-limit technique. Presumptuous that prevailing conditions and fundamentals remain constant; they may be glad to wait. 

However, being patient does not mean that they do not reassess other possible prospects for their investments with time. They are, however, less vulnerable to volatile short-term movements.

Pros and Cons of Stop-Limit and Stop-loss Orders

Both stop-limit and stop-loss orders help provide a certain level of protection to traders. These orders are a great tool if you would like more control of the risks in the crypto market, primarily which is known to be so volatile. These are the possible pros and cons posed to users of stop-loss and stop-limit strategies:

Pros

  • Stop-loss orders are final, thus eliminate room for emotional decision-making.
  • Stop-limit orders help safeguard against extreme price volatility up to a certain degree.
  • Stop-loss orders control the number of funds an investor is willing to lose
  • Limit orders can help save money

Cons

  • Stop-limit orders do not guarantee trades
  • Both can lead to marginal returns if not well placed

Conclusion

There you have it! An ultimate guide on significant factors of stop-loss and stop-limit strategies as a vital part of crypto trading. Whether you decide to use stop loss or stop-limit order or both, they are a perfect way to ensure protection for long-term and short-term traders.

Stop limit mainly guarantees price, while stop loss guarantees execution. Stop orders also help minimize losses and risks, in turn maximizing returns. From this guide, it is precise that using orders is an integral part of crypto investing.

Conduct due diligence on other great trading strategies, and combined with orders, you are sure to earn a lot of profit. And take every word as necessary!

Adam is an outgoing young lad who likes adventures and discovering new things. Despite his boring life, he loves writing about cryptocurrencies and exploring what blockchain technology can do for the coming digital world where all adventures will be virtual.