TL;DR

A stop-limit order combines a stop trigger and a limit order. 

Stop-limit orders allow traders to set the minimum amount of profit they’re happy to take or the maximum amount they’re willing to risk on a trade.

Once the trigger price is reached, a limit order will be placed automatically, even if the user is logged out. 

Stop-limit orders can be tactically positioned by integrating additional market indicators, such as the resistance and support levels.

Stop-Limit Order vs. Limit Order

A limit order is an order to buy or sell a specific amount of cryptocurrency at a specified price. When you place a limit order, you are essentially specifying the maximum price you're willing to pay to buy a cryptocurrency or the minimum price for which you're willing to sell it.

Typically, traders place sell limit orders above the current market price and buy limit orders below the current market price. If you place a limit order at the current market price, it will likely be filled within a few seconds (unless it's an illiquid market).

On the other hand, a stop-limit order is an order to buy or sell a cryptocurrency when it reaches a specific price, known as the stop price, and then execute the trade at a limit price you set. The limit price is the minimum amount you're willing to accept when selling or the maximum amount you're willing to pay when buying.

The main difference between the two is that a limit order is used to specify the price at which you want to buy or sell, while a stop-limit order is used to specify the price at which you want to trigger a trade and the price at which you want to execute it.

How Does a Stop-Limit Order Work?

A stop-limit order is an advanced trading order that combines elements of a stop order and a limit order. It’s commonly used in cryptocurrency trading to automatically buy or sell a cryptocurrency once it reaches a certain price level.

The best way to understand a stop-limit order is to break it down into parts. The stop price acts as the trigger for placing a limit order. When the market reaches the stop price, it automatically creates a limit order with a custom price (limit price).

Therefore to create a stop-limit order, you need to set two different price points: a stop price and a limit price. The order becomes active and triggers the limit order when the stop price is reached. The limit price is the price at which the order will be executed once the stop price is reached.

Examples of Buy and Sell Stop-Limit Orders

How buy stop-limit orders works

Let’s say BNB is currently trading at $300, and you'd like to buy it when it starts a bullish trend. However, you don't want to pay too much for BNB if it starts to rise quickly, so you need to limit the price you are willing to pay.

Suppose your technical analysis tells you an uptrend may start when the market breaks above $310. You decide to use a buy stop-limit order to open a position in case the breakout occurs. You set your stop price at $310 and your limit price at $315.

When BNB hits $310, a limit order is placed to buy BNB at $315. Your order could be filled at $315 or lower. Note that $315 is your limit price, so if the market moves above it too quickly, your order may not be filled in full.

How sell stop-limit orders work

Suppose you bought BNB at $285 and it's now at $300. To prevent losses, you decide to use a stop-limit order to sell BNB if the price falls back to your entry price. You set a sell stop-limit order with a stop price of $289 and a limit price of $285 (the price at which you bought BNB). When the price reaches $289, a limit order is placed to sell BNB at $285. Your order may be filled at the price of 285 or higher.

The stop and limit prices can be the same, but it’s generally safer to set the stop price (trigger price) higher than the limit price for sell orders. For buy orders, you can set the stop price a little lower than the limit price. This increases the chances that your limit order will be filled after it’s triggered.

Advantages of a Stop-Limit Order

Customization

A stop-limit order lets you customize and plan out your trades. Traders can specify both the trigger price (stop price) and the price at which they want to buy or sell (limit price), ensuring that they get the best possible price for their trade.

Precision

Stop-limit orders allow traders to set specific prices at which to buy or sell cryptocurrencies. This precision helps traders avoid buying or selling at unfavorable prices.

Risk management

Stop-limit orders help traders to manage their risks by setting up automatic buy or sell orders to protect their investments. This can be especially important in the 24/7 crypto market. These orders are triggered when the price of the cryptocurrency reaches a certain level, so they can help to prevent significant losses in the event of a sudden price drop or market volatility.

Risks of a Stop-Limit Order

Execution risk

The main risk with stop-limit orders is that the order may not execute at all or be only partially executed. This can happen if the market price moves too quickly and skips over the stop price. In this case, the limit order will not be triggered, and the trade will not be executed.

Price risk

Another risk is that the limit order may not be executed at the desired price. For example, if the market price falls rapidly after triggering the stop price, the limit order may execute at a lower price than intended.

Timing risk

Stop-limit orders may also be subject to timing risk. If the stop price is triggered during periods of high volatility or low liquidity, the limit order may not be executed at the desired price, or it may not execute at all.

Strategies for Placing Stop-Limit Orders in Crypto

1. Setting stop prices based on technical analysis

Traders can use technical analysis to identify key support and resistance levels and then set their stop prices accordingly. For example, if a trader believes that Bitcoin has strong support at $30,000, they may set their stop price just below this level to limit their potential losses.

2. Combining stop-limit orders with other strategies

Traders can combine stop-limit orders with other crypto trading strategies, such as dollar-cost averaging, to further manage risk and optimize returns. For example, a trader might use a stop-limit order to sell a portion of their position at a certain price while also using dollar-cost averaging to build their position slowly over time.

3. Trend trading

Trend trading involves placing stop-limit orders based on the direction of the trend. For example, if the trend is bullish, a trader may place a stop-limit order to buy at a higher price in hopes of catching a continuation of the uptrend. Conversely, if the trend is bearish, a trader can place a stop-limit order to provide some level of protection by limiting the sell order at a certain price. 

4. Breakout trading

This strategy involves using stop-limit orders to take advantage of price breakouts. A trader may place a stop-limit order to buy at a higher price if the price breaks through a resistance level or a previous high. Conversely, a trader may place a stop-limit order to sell at a lower price if the price breaks through a support level or a previous low.

Closing Thoughts

A stop-limit order is a powerful tool that can give you more trading options than simple market orders or limit orders. It also has the added benefit of not requiring you to be actively trading for the order to be filled. By combining stop-limit orders, it's easy to manage your position, whether the price is rising or falling. 

It comes with numerous risks, however, and requires a higher level of trading experience and technical analysis skills. 

Further Reading

How to Read the Most Popular Crypto Candlestick Patterns

Market Makers and Market Takers Explained

What Is the RSI Indicator?

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