What are Stop Orders and How They Help Prevent Losses

Ivan Skladchikov
August 21, 2020
What are stop orders

Imagine the following. It’s a calm evening after a hard day of trading. You decide to make yourself a calming cup of tea to celebrate a successful run. Just as you live the room for five minutes, your main asset’s price plummets in response to a panic caused by news of upcoming regulatory changes. Achievements reverted. Worse — you lost money. Maybe a lot.

A situation like the above is possible if you forget to set up stop orders. Stop orders in crypto trading help you avoid losses you can’t afford so you can make bigger profits at the end of the day.

In this article, we are going to explain how to use this simple but powerful trading tool. You will learn how these safety nets work to your benefit. Without further ado, let’s dive right in.

What are Stop Orders?

Stop orders (or stops) are simply orders that execute automatically when the price of an asset reaches a set mark. It’s called stop/trigger price. Stop orders initially became popular in traditional trading, but now they are widely available on most crypto exchanges.

Stor orders ensure that you can buy or sell an asset at exactly the right moment. When the price starts going up or sell when it gets dangerously low. A side benefit of stop orders is improved quality of sleep for some traders. ?

Did you know? Market orders let you sell or buy assets immediately, but at the price dictated by the platform. Limit Orders allow setting a custom price, but they may take some time to be filled. Read our detailed guide to learn more.

This is how a stop-limit order works for buying a growing asset. Image source: Onlinezaehler

Why Mastering Stop Orders is Essential to Minimize Losses?

for example, let’s imagine that you bought 1 Bitcoin for $10,000. Your goal is to double this money.

Also, let’s assume that you can’t afford to lose more than 10% of your investment. So, in the case of a market crash, you must sell Bitcoin when the price hits the $9,000 mark.

The problem is, this price drop may happen anytime. For example, when you are sleeping. Or when you are losing the WIFI signal in the subway. Or when you are stranded on a desert island without any means of contacting the outside world. Ok, maybe let’s scrap that last one. You get the point.

What’s the solution? A stop-loss order. As soon as the price of your crypto reaches the set mark, the system will place a sell order on your behalf. So, the good news is that even if you end up on a desert island, you won’t lose more than 10,000 of your investment. Hurray?

But selling assets when the price gets low is not the only application of stop-orders. You can also use them to sell when the price rises to the desired mark.

How to correctly use Stop Orders to Buy and Sell Assets?

It’s a good idea to sell assets with stop orders if:

  • The asset has reached your target price and you are satisfied with the returns.
  • The price has decreased to a point where you will not be comfortable with the losses if it goes further down.

It’s a good idea to buy assets with stop orders if:

  • The asset’s price reaches a price mark that indicates the potential for further growth.
  • The price falls to a point where a bounce back is likely, thus you will have an opportunity to sell when it grows.

Stop-loss orders are the most popular ones. It makes sense. Being able to exit at the right moment if things start heading south is vital.

Did you know? Opt for a stop-market order when you need to sell or buy your asset fast and at the best price available at any given moment. Opt for a stop-limit order to sell or buy the asset at the price you set yourself.

How to Set a Stop-Limit Order?

On your exchange website, navigate to the order window and select the Limit tab. Specify the amount and price.

Then, go to the Stop-Limit tab and enter your stop and limit prices there. Note that a stop price should be higher than a limit price. For instance, $9,100 and $9,000 (if your loss limit is 10%).

Here’s the reason why. If the market is feverish, the price of the asset might be going down too fast. In this case, the gap between the two prices gives the exchange some time to execute your limit order. 

Exchange interfaces may vary, but you will usually find stop orders in the Order tab.

What are the Downsides of Stop-Orders?

Unfortunately, it’s not all positives. Stop-loss orders also have their cons. They may cause you to sell your cryptocurrencies at a low price before it has time to recover.

Sometimes, it is better to have these stop prices set in your head. In this case, you have enough time to make a balanced decision. It’s not for everyone — you have to monitor the market closely and understand price patterns.

As always, it’s up to you to decide.

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