What is Stop Limit Order?

A stop limit order is a type of order used in cryptocurrency exchanges or financial markets that provides control over buying or selling under specific "strict conditions", used for stop-loss and taking profits.

What is Stop Limit? How to Use Stop Limit?

In financial markets, it's an order type used to minimize losses and manage portfolios more effectively. A stop limit order combines a stop trigger with a limit order. Investors use stop limit orders both for protecting profits and cutting losses.

Before placing a stop limit order, the investor must determine the trigger price and the limit price level at which the transaction will occur. Once a stop limit order is placed, it will execute if triggered even if the investor is offline. Cryptocurrency investors can strategically place stop limit orders by considering support, resistance levels, and asset volatility.

Stop Limit Order Example

Stop limit orders have 2 subcategories. These are buy stop limit orders and sell stop limit orders.

A - Buy Stop Limit Order

Buy stop limit orders are typically placed in anticipation of a trend breakout in an upward-trending asset or when testing an important support level.

Example 1; Let's assume Bitcoin's market price is $20,000, and if the price breaks above $20,500, an upward trend might begin up to $22,000. In such a scenario, you set the trigger price at $20,500 and the limit price at $20,600. When Bitcoin reaches $20,500, a limit order to buy at $20,600 is placed. The limit order will execute at $20,600 or a better price. However, if the price rises rapidly, it might quickly pass your limit price of $20,600, and your order might not be fully executed.

The example of buying with a stop limit order after resistance breakout is shown in the graph:

Example 2; Let's assume Bitcoin's market price is $20,000, and if the price drops to $18,900, an upward movement might begin from support. In such a scenario, you set the trigger price at $18,900 and the limit price at $19,000. When Bitcoin reaches $18,900, a limit order to buy at $19,000 is placed. The limit order will execute at $19,000 or a better price. However, if the price rises rapidly, it might quickly pass your limit price of $19,000, and your order might not be fully executed.

The example of buying with a stop limit order after support zone activation is shown in the graph:

B - Sell Stop Limit Order

Sell stop limit orders are typically placed in anticipation of a trend breakout in a downward-trending asset or when testing an important resistance level.

Example 1; Let's assume Bitcoin's market price is $20,000, and if the price breaks below $19,500, a downward trend might begin down to $17,000. In such a scenario, you set the trigger price at $19,500 and the limit price at $19,400. When Bitcoin drops to $19,500, a limit order to sell at $19,400 is placed. The limit order will execute at $19,400 or a better price. However, if the price falls rapidly, it might quickly pass your limit price of $19,400, and your order might not be fully executed.

The example of selling with a stop limit after support zone breakdown is shown in the graph:

Example 2; Let's assume Bitcoin's market price is $20,000, and if the price tests the resistance level at $22,000, a downward movement might begin. In such a scenario, you set the trigger price at $22,000 and the limit price at $21,900. When Bitcoin reaches $22,000, a limit order to sell at $21,900 is placed. The limit order will execute at $21,900 or a better price. However, if the price falls rapidly, it might quickly pass your limit price of $21,900, and your order might not be fully executed.

The example of taking profit by selling at resistance with stop limit is shown in the graph:

Stop Limit Order Advantages

Stop limit orders allow you to create your strategy according to market conditions and customize orders based on your expectations. Many investors cannot monitor prices constantly. In such cases, investors can set appropriate buy points or sell points to prevent deeper losses using stop limit orders in case of trend changes.

Stop Limit Order Disadvantages

Stop limit orders share similar disadvantages with limit orders. For example, in a position where you execute a stop limit order to prevent deeper losses, the market price might not behave as expected after the order executes and could show an upward movement. If there aren't enough market buyers, liquidity issues may occur. If you want to avoid partial execution of the order, you can widen the limit range.

What's the Difference Between "Stop Limit" and "Stop Loss" Orders?

While stop limit orders and stop loss orders may seem similar, they actually have different structures. Stop loss orders don't have an execution limit price. In other words, the position is closed directly from the market with the given order. Therefore, stop loss orders are particularly dangerous during times of low liquidity.

Unlike stop loss orders, stop limit orders set boundaries for buying or selling, preventing potential adverse situations. With stop limit orders, investors execute buy or sell transactions within a specific price range.

What's the Difference Between "Limit" and "Stop Limit" Orders?

The main difference between "stop limit orders" and "limit orders" is that limit orders are completed at the specified limit price or better, while stop limit orders are completed at the specified limit price or better after reaching the target trigger price.

Should Stop or Limit Be Higher?

In stop limit orders, sometimes the limit order can be higher, and sometimes the stop (trigger) price can be higher, depending on the order type. For example, if placing a sell stop limit order, an investor can create stop limit orders above or below their determined trigger price for the asset they want to sell.

What Does a Stop Order Mean?

A stop order is closing a position according to the given order when the price reaches certain levels for a taken position and asset. For example, a BTC investor can prevent potential losses by placing a sell stop limit order in case the price falls.

What is a "Trigger Price" in Cryptocurrency?

A trigger price is defined as the prerequisite that must be met for submitting the secondary order to the market or closing the position in conditional order types such as stop loss and stop limit orders.