How does a stop-limit order work?

The main purpose of a stop-limit order is to help users maintain profits and minimize losses.

Please note! Lifetime of an open order - please note that if the order is not executed within 3 months from the moment of its opening, the order will be automatically canceled.

A stop-limit order consists of two components: stop and price limit.

The user determines in advance the limit price of the order, at which it will be executed.

The stop price defines the price level, at which the order will be placed at the limit price.

1. Using this type of order to place a stop loss order, if the price drops to a critical value, a sell order will be placed:

For example, the last BTC trade price was 70,000 USD:

Stop - 69,000 USD (the condition under which the Limit order is activated);

Limit - 69,000 USD;

Quantity - 1 BTC.

Under this condition, if the price drops to 69,000 USD, a limit order to sell 1 BTC at a price of 69,000 USD will be initiated.

This example carries certain risks. The main one is an insufficient number of orders (liquidity) in the order book, which can lead to the fact that when price drops to 69,000 USD, there will be not enough counter offers to buy at this price, meanwhile the market price will go lower, thus your limit order will not be executed and will remain in the order book.

A possible solution is to set a Limit order that will be below the market price, for example:

Stop - 69,000 USD (the condition under which the Limit order is activated);

Limit - 68,900 USD;

Quantity - 1 BTC.

Under this condition, if the price drops to 69,000 USD, a limit order to sell 1 BTC at a price of 68,900 USD will be initiated. Since the order book will contain offers to buy above the Price Limit, the order will be executed immediately. If there will be not enough buy order volume to fill your sell order, the rest of the sell order will remain in the order book at a price of 68,900 USD.

In this case, you need to be careful with the Limit price. If it is set significantly below the market price with a large order volume, and if there is an insignificant buy volume in the order book, the order will be executed instantly up to the set limit price. It is possible to sell the asset significantly less than the planned price.

2. Using this type of order as a pending order for buying, or for buying "on a breakout":

For example, the task is to place a limit order to buy 1 BTC if the price exceeds the mark of 70,000 USD:

Stop - 70,000 USD (the condition under which the Limit order is activated);

Limit - 70 100 USD;

Quantity - 1 BTC.

As soon as the price overcomes the 70,000 USD mark, a limit order will be placed to buy 1 BTC at a price of 70,100 USD. The order will be executed immediately and will redeem all sell orders in the order book up to the price of USD 70,100. If the order volume in the sell order book are not enough to execute the volume of 1 BTC, the rest of the order will remain in the order book at a buy price of 70,100 USD.

Thus, we have reviewed the main examples of using a Stop-Limit order. This tool will allow you to use your trading strategies more flexibly.