If you are new to the cryptocurrency space, buying and hodling crypto should suffice. When stepping further into trading—either swing or day trading—you need to know about the orders available on cryptocurrency exchanges. You also need to understand how they work and when to use them. Failing to understand how these orders work may cost you large chunks of your trading capital, especially as a newbie with little experience. You can also get the best entry and exit points in price through using trading orders other than the market order.
Bitcoin trading interface on a cryptocurrency exchange platform.
There are several types of orders used in trading cryptocurrencies on exchanges. Most exchanges, especially decentralized exchanges (DEXs), have a single type of trading order available for users.
The market order is the most used, especially for people who intend to buy and hodl. Yet, there are distinct orders available on more advanced trading platforms, which crypto traders favor.
Limit orders and stop orders are popular among cryptocurrency traders; traders can use them to lock in profits, close losing positions early, and get the best bargains on buys and sells. While this article focuses on everything you need to know about stop orders, you also need to understand how limit orders work.
Limit orders are trading orders to buy or sell at a particular price or a better one. With a limit order, you set a defined price range at which the market makers will fill your order. One order which traders usually combine with limit orders is a stop order.
What Are Stop Orders?
Take this example…
Jack, a cryptocurrency trader, wants to buy X Coin at $0.45. X Coin is currently trading at $0.52, so Jack has to stay on the screens and wait for the price to hit $0.45 before opening his order. He has a lot of work elsewhere and doesn’t have time to hang around looking at price charts. Jack does not know how to use stop orders, so he has no clue how to save his precious time!
Types of orders available on Binance Exchange futures contracts. (Source: Binance mobile app)
A stop order triggers a buy or a sell action at a specific price. The stop order is an activator used to initiate actions at the trader’s discretion. With a stop order, you can enter or exit a trade at your desired mark price or the closest price in either direction. While limit orders deal with ranges and sometimes may not fill if the price moves beyond the limit without a trigger, stop orders have a specific price and trigger immediately when the price hits it.
How do Stop Orders Work?
Jack has read this article, and he now understands how stop orders work. Instead of spending hours waiting for the price to get to his desired point, Jack places a buy stop order at $0.45. Immediately the price descends and hits the $0.45-mark, Jack’s buy stop order is triggered, and the buy order fills at the market price. Traders usually combine stop orders with market orders or limit orders. The stop activates to give way for the desired order to fill. The type of stop order Jack used is known as a stop market order.
Graphic explanation of the types of trading orders.
Types of Stop Orders
Due to their peculiarity in triggering at specific prices, cryptocurrency traders use stops to carry out a variety of trading actions. Here are the various types of stop orders below:
When a trader places a stop that triggers a buy order, the trader has used a buy stop. If the market sentiment is bullish, and you want to buy a coin, you can use a buy stop to buy at your desired price. You can also use a buy stop to exit a selling position when trading futures. Buy stop orders are used to purchase coins at market prices.
The opposite of buy stops, traders use a sell stop order to trigger a sell at market prices. When you want to sell a coin at a specific price on a crypto exchange, you can use a sell stop to ensure your sell order is filled at the desired price. You can also use a sell stop to exit a losing position. When a buy trade is against you, or when protecting your capital from liquidation, you can use a sell stop to leave losing positions early. You can also use a sell stop to lock in profits when in a buy position when trading futures contracts.
The only difference between a regular stop order and a stop-limit order is that in the former, the stop prompts a market order, but in the latter, it activates a limit order. You use a stop-limit order to execute buy or sell limit orders.
When the market price hits the stop price, the limit order is opened and fulfilled if the price falls within the set range.
The most used stop order is the stop loss. Experienced traders will always advise newbies to trade with a stop-loss to keep them from getting ‘rekt’ by sudden price movements. A stop loss is triggered when a trade moves against you; so, you should place it in the opposite direction that you want the transaction to go. You can use a stop loss to protect your capital in case things do not go your way.
When to Use a Stop Order
● When you want to buy or sell at the desired market price, and you do not want to entertain any losses due to slippage.
● To close losing positions.
● To lock in profits–trailing stop.● To enter or exit and get the best deals.