Trading 101 — Order Types: Stop Orders

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Trading Interface of a Financial Terminal

A stop order is an order to buy or sell an asset which is triggered and convert into a market order when the market price of the asset reaches the value set for the stop order (can convert in a limit order if stop-limit). A stop order is used to protect from losses or secure profits.

Pros: Certainty of fast and full execution. Not visible on the order book (= by other traders) until triggered. Can be cancelled.

Cons: Price not warranted after stop order is triggered (floating execution price: market order).

Example:

You bought ABC at $9,500 and know the market can be volatile. You want to protect your position when being away from the screen.

1- Stop-loss (sell btc/buy usd): A stop order to sell ABC if the price is touching or falling below $9,000 (whatever the price will be afterwards, as it becomes a market order) will protect you from suffering heavy losses in case of sudden downward trend bellow this price.

2- Take-profit (sell btc/buy usd): Your trading strategy on this position is to make $500 profit per ABC. You want to sell automatically if the price goes above $10,000 (whatever the price will be afterwards).

Stop order example: stop-loss or take-profit

Using a stop order results into paying the taker fees to the Broker/Exchange (as convert into a market order).

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