If you are a novice trader, you cannot do without familiarizing yourself with the concepts of stop loss and stop limit. It is important to know that they are not the same. Yes, both orders are necessary to automatically sell an asset if the price drops. This way you can reduce risks if quotations fall.
But these two stops act differently, which means they can lead to different, sometimes negative, outcomes. Let's take a closer look at each of them and compare.
What is stop-loss?
The stop-loss is an order to sell an asset at market price. You set the price at which you want to sell the asset to avoid a large loss. When the value of a financial instrument approaches the value you need, the order will execute at the market price closest to the value you set.
With a stop loss, the trade may slip and execute at an undesired price if it does not reach the value you need.
Example of stop-loss
The trader bought the asset at a price of 270 cubic feet. To protect against losses, he placed a stop limit order at 265 yuan. When the quotation price reaches this limit, the asset will automatically be put up for sale and sold at the price of 265 cubic feet or near it, if there is no such offer in the market, for example, 264.5 cubic feet.
What is the stop limit?
When setting a stop limit, there is no slippage. The currency 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 where there is no counterparty willing to buy the asset at your price. This usually happens when prices drop rapidly.
Examples of stop limit requests
The trader bought a coin for 250 euros. He decided to 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 execute automatically. If the price does not reach this level, but for example, drops to 244, crossing the 245 mark, the stop limit will not work. The trader will incur a greater loss than expected.
Differences between stop loss and stop limit orders
1. The stop-loss always executes, but there is no guarantee that it will happen at the expected price. It may differ due to low liquidity of the currency. The stop limit does not always work, but it performs a transaction at a strictly established price.
2. With stop-loss, price slippage is common. This does not happen with stop-limit.
3. The stop-loss can lead to executing a transaction at an unfavorable price for you. The stop limit increases the risk of losses.
Both orders can positively or negatively affect your income. It all depends on you. Understand the mechanism of their action and use it wisely.
Properly set stops make trading in the cryptocurrency market easier and more profitable.
