What is a Stop-limit Order？
Stop-limit orders combine the features of a stop order with those of a limit order. A stop-limit order will be executed after a given stop price has been reached. Once the stop price is reached, the stop-limit order becomes a limit order to buy or sell at the limit price or better.
To put it simply, a stop-limit order is a conditional trade over a set time frame based on a stop order, which will not be filled until the limit price traders have set is reached.
Real-World Example of a Stop-limit Order:
For example, assume you have bought BTC at the price of 10,000 USDT. In order to mitigate risk, you want to sell it once it begins to show some serious downward momentum. You place a stop-limit order to sell with the stop price (or trigger price) at $9,800 and the limit price at $9,700. If the price of BTC drops to the $9,800 stop price, the order will be activated and turn into a limit order. As long as the order cannot be filled above $9,700, which is the limit price, the trade will not be filled.
Upsides and Downsides
The primary advantage of a stop-limit order is that traders have precise control over when the order should be filled. The order will not be filled after being triggered to execute if the limit price cannot be matched.
The downside is that the trade is not guaranteed to be executed if the stop price can’t be reached during the specified time period due to the fast-changing market.
Similarities and Differences Compared with Stop-market Order
Similarities:
1. Both a stop-limit order and a stop-market order have two basic price settings: a stop price and a trigger price.
2. Those orders can help traders lock in profits or limit downside losses.
Differences:
1. Stop-market orders are executed at the current market price while stop-limit orders are triggered at the limit price, which is set by the traders.
2. Stop-market orders ensure trade execution for traders while stop-limit orders guarantee the trade price.
Stop-market orders can guarantee a real-time buy or sell as they will be transferred into market orders after being activated but they may not be filled at traders’ expected price. On the contrary, stop-limit orders can ensure the fulfillment price under trades’ favorite but they are not guaranteed to be executed.
Factors for Reference to Put a Stop-Limit Order
1. Assets’ Volatility
Leave a gap between the stop price and the limit price when setting a stop-limit order to increase the chance of order fulfillment based on the assets’ price fluctuation.
2. Assets’ Liquidity
Traders may use stop-limit orders more than stop-market orders when the market meets low liquidity.
Apply technical analysis tools for the setting of the stop price.
