Stop-Limit Order

A Stop-Limit Order is a combination of a stop-loss and a limit order. It is used for the automatic buying or selling of an asset when its price reaches a predefined level (the stop price), but with the addition of a limit on the execution price. This allows traders to control the price at which the order is executed and minimize the risk of buying or selling at an undesirable price.

How a Stop-Limit Order works:

1. Stop Price: This is the price at which the order is activated. It works similarly to a stop-loss order.
2. Limit Price: This is the maximum price (when buying) or the minimum price (when selling) at which the order will be executed after the stop price is triggered.

The order will not be executed if the market price does not reach the limit price after the stop price is activated.

Example:

• You hold 1 BTC, and you want to sell it if the price starts falling below $30,000.
• You set a stop price at $29,500 and a limit price at $29,000.
• If the price of Bitcoin falls to $29,500, the order will be triggered.
• If the price continues to fall to $29,000 or lower, the order will be executed at the limit price or higher.
• If the price falls quickly below $29,000, the order will not be executed because it is below your limit price.

Advantages:

• Price control: Unlike a stop-loss order, which is executed at the market price once triggered, a stop-limit order allows you to set a price range within which you are willing to buy or sell.
• Flexibility: It helps traders avoid the execution of an order at a price that deviates significantly from the desired price.

Disadvantages:

• No guarantee of execution: If the asset’s price changes sharply and crosses the limit price, the order may not be executed. This is particularly relevant in volatile markets.
• Complexity: It requires more careful planning, as you need to determine both the stop price and the limit price, adding complexity to setting up the order.

Example of use:

Suppose you want to sell ETH if its price drops below $2,000 but don’t want to sell it below $1,950. You set the stop price at $2,000 and the limit price at $1,950. If the price reaches $2,000, the order will be activated, but it will only be executed if the price does not drop below $1,950.