A stop loss order is an order to buy or sell a coin once a certain market price is reached. They are used to control risk and limit losses.
If you have a coin to sell, you can put a stop order to sell it if the price goes lower (i.e. worse). Conversely, if you are short selling and are betting the markets will move downward, you can set a stop order at a higher (also worse) price.
There are 2 main reasons to use a stop loss. The first is to control and minimize losses. The second is to lock in profits. In this article, we’ll cover the 3 main types of stop-loss order, starting with…
Fixed Stop Market Orders
This is also known as a regular or vanilla stop-loss order. It’s placed at a price worse than your entry price. Should the market reach your stop price, a market order is placed and filled at whatever the current bid or ask is.
Fixed stop market orders are good in fast-moving markets with a lot of volatility. They ensure that no matter how fast prices move, your order gets filled. Unfortunately, this can also result in significant slippage and losses during tumultuous periods.
Stop Limit Orders
A stop limit order is just like a stop market order — with one important difference.
The stop market order is filled at whatever the current bid or ask is when triggered. The limit stop loss order is filled as a limit order, meaning it’s only executed at a specific price.
The caveat is that sometimes, stop limits may go unfilled and lead to significant losses. To make sure this doesn’t happen, it’s important you practice using both until you’re comfortable with regular and limit stop orders.
A trailing stop is like a moving goal post that cannot move more than a certain distance away from price. Here’s how that works.
Let’s say you bought one bitcoin at $10,000. The price goes up to $11,000, and you want to lock in that profit. However, you also want to lock in any future profit you might make — for example, if bitcoin goes up to $12,000.
What you can do here is place a trailing stop loss order that moves up together with a coin’s price. If you set trailing stop loss that’s $500 below the current price of $11,000 and bitcoin goes up to $12,000, the stop will also move, helping you secure a bigger profit.
That might still seem a bit confusing, so if you want to see every kind of stop order in action, just go to Academy where we cover each stop loss type in more detail and with examples.
For now, though, just remember:
Regular stop losses sell a coin at the market price.
Trailing stop losses go up when the price goes up but stay level when prices go down.
Limit stop losses execute as limit orders.
Would you like to learn more about crypto trading? Сheck out our educational platform Adara Academy