When you start to trade cryptocurrency, you will definitely use different trading order types like market order, limit order, stop order, etc. The first one is easy to understand and use, so we will skip the explanation of market order. But many of you might get confused about limit order and stop order. In this article, we will explain how they work and the circumstances in which they can be useful. Limit order vs stop order, what are the differences? Hopefully, you will be enlightened after reading the whole article.
What Is A Limit Order?
As we all know, different types of orders allow traders to be more specific about how they’d like their orders to be filled as well as the price and quantity to be filled. When trading cryptocurrencies, seeing how volatile they are, one would need to monitor the price 24/7 which is simply not feasible. A limit order is an order to sell or buy a certain amount of coins at a specific price or better. How does it work? If you want to buy in 2 BTC at $3,500 when the current market price is $3,600, you can place a limit order that won’t be filled unless the price you set becomes available. When that happens, you will get the number of coins you requested at $3,500 or lower.
Please note, while it is possible to set a limit order higher than the current market price when buying, this would not be logical as it would be filled immediately at that price and you would just pay more. The same applies to going under the current market price when selling.
What Is A Stop Order？
Stop orders, also commonly called conditional orders, are a type of order that traders use when they wish to buy or sell cryptocurrencies at a specific trigger price. This can be done to profit from future price fluctuations or as a part of a trading strategy. For example, if right now the price is very low but you expect it to rise. You do not wish to take any risk and set a stop order to buy only when the price starts to rise again to confirm your prediction. There are different types of stop orders that function in different ways and serve different purposes but all of them have a trigger price that activates the order.
Stop Limit and Stop Market Order
There are two types of stop orders commonly used: Stop Limit and Stop Market Order.
A stop limit order can be used once a specific trigger price or stop has been met. For example, if you buy 2 BTC at $3,500 and expect the price to rise, you can place a stop limit order to sell them in case the market doesn’t go in the direction you expected. You set the stop price at $3,400 and the limit price as $3,450. The order will be triggered if Bitcoin is traded at $3,400 or lower. But it will not be filled immediately because you set the limit price to be $3,450, meaning that only when there are buyers willing to pay that much for 2 BTC, your deal will be done just like a regular limit order.
Please note that the difference between a limit order and a stop limit order is that the stop limit order will be used only if a specific criterion is met, here to limit your potential loss, while a limit order would here have directly resulted in a loss for you.
From the information above, you can easily infer that a stop market order will turn into a market order once it has been activated. In the previous case, your order won’t be filled because that price is not available in the market at the time your order is triggered. In a stop market order, it will be immediately executed at $3,400 or at the best possible price for you.
Not only can Stop Limit and Stop Market Order be used to exit a trade, but they can also be used to enter a position as well. If the current BTC price is at $3,500 and you intend to buy when there is a more upward momentum. In this case, you can set a stop limit order or stop market order above the market price.
Limit Order VS Stop Order
Comparing these two orders makes little sense as they have very different purposes and are used in different situations. But both order types are very useful and help traders to automate their trades in the best possible way for them and can help them set-up their strategies and hopefully profit in the best possible way from the markets.
All in all, limit orders can guarantee a trade at a particular price while stop orders can guarantee your profits if used properly by ensuring that your coins are sold before the price falls below purchasing price. Stop limit orders allows traders to control the price at which the order is executed by setting the trigger price and possibly a limit price.
This concludes today’s article on limit order vs stop order, how do they work and their differences. We hope you learned a lot, enjoyed the read, and stay tuned for more great content.