What is a Stop Order?
A stop order or stop loss order is an order to buy or sell a digital asset at the market price once the stock has traded at or through a specified price (the “stop price”). The order is valid until it’s closed or cancelled by the user. As stop orders are executed at the market price, stop orders are also known as stop market orders.
A stop order aims to limit the loss to a small range when investment performance is disappointing. That is, when the loss reaches the allowed limit, the position will be closed immediately to avoid greater losses.
A buy stop order and a sell stop order
According to the direction of a trade, stop orders are divided into buy stop orders and sell stop orders.
A buy stop order means if the market price reaches or breaks through a specified price (the “stop price”), the stop order to buy is triggered and executed at the market’s current price. In general, a buy stop order is entered at a stop price above the current market price.
A sell stop order means if the market price drops to or fall further below the stop price, the stop order to sell is triggered and executed at the market’s current price. In general, a sell stop order is entered at a stop price below the current market price.
For both a buy stop order or a sell stop order, its roles mainly involve the following three aspects:
1. The stop order to buy is triggered to enter the rising market immediately.
For example, BTC is currently trading around $10, 000. According to the estimates, once BTC breaks through the key level of $10, 000, it is likely to continue to rise. Therefore, you set a stop order to buy with a stop price of $10,100. Once the rally reaches or breaks through $10,100, the stop order to buy will be triggered and executed at the market’s current price to deal with a rising market.
2. The stop order to sell is triggered to exit from the falling markets and avoids greater losses.
For example, the market continues to decline after you bought 1 BTC at $10, 000. You estimate that BTC prices will fall further, so you set a stop order to sell with a stop price of $9,800. Once BTC prices fall to or breaks below $9,800, the stop order to sell will be triggered and executed at the market’s current price to deal with a falling market, avoiding greater loess.
3. A Stop order is triggered to protect short/long positions when the market is moving contrary to expectations.
For example, BTC is currently priced at $10, 000, and you opened a short position at $11,000 and you have a profitable balance on your account. However, the current market trend is not clear, if the market declines further, you will continue to make a profit; but if the market goes up, you will lose your existing profit or even risk a loss. As a result, you choose to set a stop-loss order with a stop price of $10,500. Once the market reached or breaks through $10,500, the stop order to buy will be triggered and executed at the market’s current price, which is equivalent to stopping profit and locking the shorting profits. On the other hand, if you open a long position when the BTC price stands at $9,000, you can also use a stop order to protect your long position after the market turns around.
Advantages and risks
Advantages: As the market order, stop order can satisfy the need for immediate execution and realize the result of instant stop of loss.
Risks: the trade price is executed at the market price, which may deviate from the expected price. In addition, as the primary goal is to ensure the execution of orders, if the stop price is set unreasonably, it is likely to lead to unnecessary losses on a fast-moving market, which sometimes rallies shortly after a sharply decline.
Factors need to be considered when placing a stop order
1. The need of trading. Stop orders are generally more appropriate for investors with short-and medium-term strategies, while for those with long-term strategies, it should be used carefully to avoid unnecessary losses.
2. Leverage technical analysis tools to assist in setting prices.