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What are Limit Orders and Stop Loss Orders in Cryptocurrency?

17 Sep 2022 By : Anirudh
Southeast Asia’s Lar

Key Takeaways

  •  A limit order is a type of market order in which the commodity or the token is bought or sold at a pre-specified price.

  • Stop loss orders are those trading orders which are placed with the broker to execute a buy or sell order for a pre-determined price.

  • Limit orders are visible in the market as soon as they are placed. Stop loss orders are not visible unless they are executed.

  • Setting up the limit orders for trade is fairly easy and ensures a safe crypto trade by limiting the risks using pre-defined prices.

Crypto markets are highly volatile and uncertain. The price of the tokens is always changing and requires the undivided attention of the traders to register profits. These vague market conditions create suitable circumstances for the development of new trading devices.

Limit orders and stop loss are two of the most prominent trading tools used in traditional finance. In this article, we are going to learn about what these tools are and how they make the lives easy of crypto traders. We will also share the methods using which you can use limit orders and spot loss effectively in your trades. 

What are Limit Orders?

If you have ever bought a crypto token and its price fell after your order was executed, you know the pain. The price kept falling right to the point you speculated but you were not in the market to buy that dip. This is a common tragedy among those who buy in the falling markets.

To deal with this challenge, traders have been using limit orders in traditional markets for a long time. A limit order is a type of market order in which the commodity or the token is bought or sold at a pre-specified price.

Buy limit orders will come into action only when the token hit the specified price or lower. This allows the traders to buy the token at a lower price if they are sure about a future fall in prices. 

On the other hand, sell limit orders are executed only when the token’s price reaches the predefined prices or above. Sell limit orders are used by traders for generating short-term gains and earning profits even when they are away from the markets.

What are Stop Loss Orders?

Stop loss orders are those trading orders which are placed with the broker to execute a buy or sell order for a pre-determined price. Stop loss orders allow investors to ensure that their funds are secure during a sudden market crash. 

Once the markets hit the predefined prices for your token, your broker will execute the order for you automatically. For example, if you have bought Solana at $35 and set a stop loss for $33, you will not have to face a loss of more than $2 no matter how low Solana goes. 

Stop loss orders safeguard investors against any unfavorable moves in the markets. This reduces the burden of monitoring the trade from the investors, especially in the crypto markets which never shuts down. 

Limit Orders Vs. Stop Loss Orders

Now when we are reading about the limit orders and stop loss orders together, they seem more or less the same. When they both are executing orders on a pre-defined price, does that mean that they are the same thing? The short answer to this question is - No, they are not the same. And in this segment of the article, we are going to elaborate on the major differences between the limit orders and stop loss orders. 


Limit Orders

Stop Loss Orders

Defines the least acceptable amount for executing a transaction

Pre-defines a trigger price point for executing a transaction 

Visible in the markets once they are made

Not visible in the markets until the predefined price is matched

Limit orders can be fulfilled by the market as per the will of the seller or the buyer

Stop loss orders can only be executed when the market reaches the predetermined prices

Can be used to register both profits and losses in the trade

Stop loss orders are typically used for reducing the losses during a crash


How to use Limit Orders and Stop Loss Orders?

Now that you know about limit orders and stop loss orders, it is high time for us to learn how these features work. Here is a step-by-step guide to know how does limit order and stop loss order work. 

  1. In the exchange of your choice, select the ‘Market’ tab

  2. Select a different order form

  3. For stop loss select ‘STOP’ and for limit orders select ‘LIMIT’

  4. Enter the amount of your transaction

  5. Choose either Buy or Sell execution for the trade

  6. Select ‘Place order’ and finalize the transaction

Setting up the limit orders for trade is fairly easy and ensures a safe crypto trade by limiting the risks using pre-defined prices. Thus, these steps are crucial for all traders as they can be foundational for a successful investment journey.

Conclusion

Crypto trading is not mere speculation and is based on deep market research. However, no matter how deeply we understand the markets, they can hit the storm any day. Limit and spot loss orders function as a safety mechanism for traders and reduce their risk drastically.

Most traders do not set the LIMIT and STOP orders as they can restrict the final profits in longer rallies. But as per the trading experts, setting up the limit calls is a great way to dodge risks in crypto investments and avoid frequent market disruptions. 

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