In the world of cryptocurrency trading, there are quite a few different order types to take into account. Just buying and selling a currency is only part of the equation. Professional traders like to use stop and limit orders, both of which have their own advantages and drawbacks. Now is a good time to compare the two and see which one could work best for you.
2. Stop Order
Albeit a stop order is an advanced trading tool, it is also the simplest of these two order types to wrap your head around. As the name suggests, a stop order is triggered automatically once the markets hits the predetermined stop price. Any trader on an exchange supporting the stop order type can set a price at which they automatically want to execute their orders. This can be done to minimize losses, for example.
Once a stop order hits its predetermined trading value, it will automatically be converted into a market order. That means your stop order will be executed as if it were any regular trade on that particular cryptocurrency market. In most cases, other traders would not even see stop orders on the orderbook either, since they will not activate unless a specific price is hit.
This can create a fair bit of confusion, though, as the orderbook may take a “dump” on buyers when stop orders trigger. To be more specific, if there was to be a large buy order around the same price, it is possible said order would get filled rather quickly. This is not a problem for most traders, but it is something to be aware of at all times.
1. Limit Order
Theoretically speaking, a limit order is an extension of a stop order. In fact, they are often called “stop limit orders”. It is a bit more complicated to explain, although not overly difficult to comprehend. Users can set a stop limit order for two different prices. One price is the stop price, and the other is the price limit. As soon as the stop price is hit on an exchange, it will send the limit order to the exchange.
This limit order will then work at the current price – or a higher price – on the market. Many traders enjoy using a [stop] limit order because it guarantees execution of the order at the price they indicated or better. That is, assuming the stop order is triggered in the first place. As one would expect, a limit order also comes with a risk factor that should not be ignored.
This risk factor comes in the form of how the limit order may not be marketable, and as a result, never execute. This is a risk that needs to be taken into account at all times. It is also worth noting one can use limit orders for both buying and selling purposes. These advanced types of orders are well worth considering, assuming one has the confidence to use these tools.
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