Trading 101-Order Types: Stop-Limit Orders
A stop-limit order is an order to buy or sell an asset on an exchange/broker which is triggered when the market price of the asset reach the set stop price value. When the stop price is reached, the order is set active as a limit order. Stop order is used to protect from losses or secure profits.
Stop-limit order is similar to a stop order at the difference that it triggers a limit order instead of a market order.
Pros: Buy/sell at limit price or better. Not visible on the book (by other traders) until triggered.
Cons: Order can take time to fulfill or never be. Stop can trigger but limit not been fulfilled in case of important volatility.
Example:
You bought ABC at $9,500 and are about to go to sleep. You know the market can be volatile and want to protect your investment.
1- Stop-loss (sell btc/buy usd): To protect yourself from suffering heavy losses, you want to sell your ABC if its price is falling below $9,000 (open a sell-limit when ABC <$9,000). After the stop is hit, the order converts in a limit order to buy at $9,000 or better (lower).
2- Take-profit (sell btc/buy usd): Your goal is to make $500 profit per ABC. You want to sell if the price goes above $10,000 (open a sell-limit when ABC >$10,000). After the stop is hit, the order converts in a limit order to sell at $10,000 or better (higher).
Using a stop-limit order usually results into paying maker fees to the broker/exchange (as often not matched immediately).
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