If you are a novice trader, then you cannot do without familiarizing yourself with the concepts of stop loss and stop limit. It's important to know that these are not the same thing. Yes, both orders are needed to automatically sell an asset if the price falls. This way you can reduce risks if quotes go down.
But these two stops act differently, which means they can lead to different results, sometimes negative. Let's take a closer look at each of them and compare.
What is stop-loss?
Stop-loss is an order to sell an asset at the market price. You set the price you need, at which you want to sell the asset so as not to go too far into the negative. When the value of a financial instrument approaches the value you need, the order will be executed at the market price that is closest to the value you set.
With a stop loss, it is possible for the trade to slip and be executed at an undesirable price if it does not reach the value you need.
Example stop-loss
The trader bought the asset at a price of 270 cu. To protect himself from loss, he placed a stop loss order at 265 yuan. When the quote price reaches this limit, the asset will automatically be put up for sale and sold at a price of 265 cu. or close to it, if there is no such offer on the market, for example, 264.5 cu.
What is stop-limit?
When setting a stop limit, no slippage occurs. The coin will be sold at the exact price you set, but if the market value does not touch this value, the stop limit will not work. That is, a situation may arise when there is no counterparty who wants to buy the asset at your price. This often happens when prices drop quickly.
Example stop-limit requests
The trader bought a coin for 250 euros. He decided that he would sell it if the price dropped to 245 euros. and placed a stop limit order. When the value of the asset reaches 245 USD, the order will be automatically executed. If the price does not reach this level, but, for example, drops to 244 cu, passing the 245 cu mark, the stop limit will not work. The trader will suffer a larger loss than expected.
Differences between stop loss and stop limit orders
1. Stop-loss is always executed, but there is no guarantee that this will happen at the price you intended. It may differ due to the low liquidity of the coin. Stop-limit does not always work, but it makes a transaction at a strictly set price.
2. With stop-loss, price slippage is a common occurrence. This does not happen with stop-limit.
3. Stop-loss can lead to the execution of a transaction at a price that is unfavorable for you. Stop-limit increases the risk of losses.
Both orders can affect your income in a positive or negative way. Everything depends on you. Understand the mechanism of their action and use wisely.
Correctly set stops make trading on the crypto market easier and more profitable.
Have a nice day everyone and profit in karma!
