Stop Limit Orders are super powerful order types for traders. They let you take profits and Stop losses whilst you are in a trade. Perfect if you can’t trust yourself to exit or you can’t monitor your trades 24/7.
- Stop Limit Orders are composed of two elements: a Stop and a Limit Order.
- Stop Limit Orders are used to place Limit Orders once a Stop price level has been met.
- Stop Limit Orders are not guaranteed to execute.
Stop Limit Orders
If you’ve never used a Stop Limit Order before, its probably because they’re a little confusing at first. At least, they were for me when I first started trading.
With my experience in mind, I’ll breakdown Stop Limit Orders to their core components, and run over a few examples so you get a complete picture of how they work and what they’re used for.
What is a Stop Limit Order?
Stop Limit Orders are composed of two main elements:
- A Stop
- A Limit Order
Stops trigger orders. For the Stop to trigger, a certain condition must be met. Usualy price must equal or exceed a given price. For example, you could place a Stop that executes when Bitcoins price goes above $50000, triggering the placement of a sell Limit Order $49999 — to take profits.
Limit Orders explained
If you want a deeper dive into Limit Orders, check out the Limit Order 101. Otherwise, here’s the simple take.
Limit Orders are orders placed for a specific amount of an asset at a specific price.
There are two types of Limit Orders; buy Limit Orders and sell Limit Orders. Buy Limit Orders are used to buy an asset, and sell Limit Orders are used to sell them.
Putting Stops and Limit Orders together
Using the Stop and Limit Order explanations above, you can figure out what "Stop Limit Orders" are.
Limit Orders that get placed when a Stop executes.
Let’s go through some examples of Stop-Limit Orders. They’re easier to understand in practice rather than in theory.
Stop Limit Order examples
You are holding 5 Ethereum on KuCoin(a cryptocurrency exchange). You bought it at $3000, and the price rises to $10000. You’re worried that you’ll lose your profits if you don’t watch the charts. Perhaps you have a full-time job.
To combat this problem, you place a Sell Stop Limit Order.
You set the Stop price at $9500 to execute a Sell Limit Order for all your Ethereum at $9450. You set it slightly lower so that it has a high likelihood of executing — important in case of flash crashes.
While you’re at work, Ethereum plunges to $3000. But, fortunately, your Stop executes (instantly) and places a sell Limit Order that executes (instantly) and fills your trade. Securing your profit.
What are Stop Limit Orders used for?
The example above gives a good walkthrough of using a Stop Limit Order to protect your gains (or Stop losses). But, that’s not it’s only use.
Say you’re in a trade, and you’re worried the price could dive at any moment. Which, it genuinely could in crypto. You can’t actually place a Limit Order at a lower price, because it will execute instantly.
So, what you can do is create a Stop Limit Order, with a Stop that’s lower than the current price, which will only execute when the price actually hits it. Rather than having your order filled immediately (which you might not want).
Using a similar analogy to the one above, as price rises, you might want to secure your profits. You can do this by updating your Stop Limit Order to execute higher as price increases.
Don’t take profits immediately. Prices could run further. So adjust your bottom line upward as prices increase over time.
Alternative to a ‘Stop loss’
Stop losses aren’t always available. Especially if you’re trading spot. Stop losses are more akin to Stop market orders, which we’ll discuss in the Stop Market Order 101.
Hiding limit orders
As you get deeper into trading, you’ll be accustomed with limit orders and how they affect level 2 data.
Firstly, limit orders are visible on exchange’s order book. Which, gives traders a publicly accessible view of the supply and demand volume in the market.
Stops, however, are not visible. And because the limit orders they’ll be triggering are not yet visible, it means there are hidden limit orders in play.
With the above in mind, be aware that order books don’t always show the full truth.
Stop Limit Order 101 summary
- Stops trigger orders when a certain price is met.
- Limit Orders are orders to buy or sell an asset at a specific price and quantity (learn more in Limit Orders 101).
- Stop Limit Order are composed of a stop and a limit order; the stop triggers the Limit Order’s placement.
- Stop Limit Orders are commonly used to secure profits, let profits run, and as an alternative to a stop loss.
- Stop Limit Orders are not visible in an exchange’s order book.
- Stop Limit Orders are not guaranteed to execute; nor are the limit orders that might be trigged after a stop executes.
Learn more about trading order types.