How To Use Limit Orders vs. Stop Order

So you have found yourself at an exchange and you are ready to make some purchases and buy some coins.  However, how do you do it?  There are several options and you aren’t sure of the best way to get the best price.  This is where a limit order will come in very handy.  So continue reading in order to find some useful tips and tricks to put in an order the next time you want to make a purchase.

What Is A Stop Order – Trigger Price

One option for orders is to use a stop order.  A stop order can sometimes be called a trigger order.  With this order the idea is that the order, a buy or sell, will not execute UNTIL the Stop Order or the Trigger price is met.  Many times people will use this along with using a limit order in order to try to get the best price that they can whether they are buying or selling coins.

What Is A Limit Order

When looking at a chart there are times you want to buy a coin for a certain price.  However, you also do not want to pay more than you have to for that coin.  This is where a limit order will come into play.  There are a few different types of limit orders and I will highlight the differences, how they work, and how a limit order and market order are different.

How Does A Limit Order Work

When a person goes to buy crypto they have a few different options.  One of those is a limit order.  With a limit order there is a specific price that needs to be hit before the price goes through.  If I were wanting to buy Bitcoin at 30,000 I could put a limit order in for 30,000 and it would not make the purchase UNTIL the price of Bitcoin hit 30,000.  So the main idea with a limit order is that there is a specific price that needs to be met before the order is executed.  Let’s get a bit more in depth about the types of limit orders so you can use them to your advantage!

Limit Buy Order

The first order and probably one of the most common is the Limit Buy order.  With this order you will want to buy a coin for a specific price.  So if I want to buy ADA ONLY if the price hits 2.00 or less then it will buy.  So while you are away from the market and not watching, that order will stay open until it is canceled or until the price of ADA hits 2.00 or less.

Limit Sell Order

A limit sell order is very common as well.  It works exactly the same way as a limit buy but it is selling instead.  So using the example from above.  Let’s say I bought ADA at 2.00, and I wanted to sell them at a specific price.  So what I could do is set a Limit Sell order for 3.00.  That means I will continue to hold the coins that I have bought until ADA reaches the price of 3.00 a coin.  Once that happens, it will sell the coins and I will keep the profit.

Stop Buy Order

Another type of Limit order is a stop buy order.  This order actually combines two different orders into one group.  With this order you have a stop price (trigger price), and a limit order.  For this example I will use ADA again.  For a stop buy order, I might want to buy 10 ADA coins for 2.30.  However, I only want to do that if the price of ADA reaches 2.00.  So if I put a stop limit order in, I could say ONLY buy ADA if the price of ADA hits 2.00, and then only buy the coins if the price can be below 2.30.  So if I were to put a Stop Limit Order in I could put a stop or “trigger” price for 2.00 and a limit price of 2.30.  So with this order, it will not ever execute until the price of ADA hits 2.00.  Once the price of ADA hits 2.00 then the limit order will start and I will buy 10 coins of ADA at 2.30 or better.

Stop Order – Stop Loss

A stop order or what most people call a stop loss order is an order to protect a coin from going down too much.  This order will help protect the person from having a coin that drops too far and having a person hold it for too long.  So with the ADA example, I could say I want to buy ADA at 2.10.  But if it drops to 1.95 then I think it will be going down to the next support level.  So if it drops to 1.95 I want to sell it all instead of the coins that I am holding in order to hold a coin that keeps going down.  So I have bought ADA at 2.10 but I can put a stop loss order in for 1.95.  That means that UNLESS the price hits 1.95, I will keep holding onto my coins.

Trailing Orders – Trailing Buy or Trailing Stop

Another type of limit order is called a trailing buy or a trailing sell.  They both work the same way however, they are opposite of each other.  The idea is that you are trying to either get into a position or exit a position and make sure you are getting the best price either way.  With a trailing order, there are a few different options you will end up having.  One of the first options that you probably will have is a “trigger” price.  This is the price when you want the Trailing order to start.  You will then have the trailing order and this could potentially have two different ways to input the trailing part of the order.  The first way is with a dollar amount, and the second way is with a percentage. 

Once you have those established let’s look at how the order works.  The order will work when the trigger price is met, after that is where things get interesting.  Depending on if you have a percentage or a dollar amount, it will trail that order from the lowest or the highest price and that will be a limit order for you. 

Now, if all of this sounds confusing let’s look at an example so we can wrap our head around it.  There are a lot of moving parts for this order so let’s break it down.  Let’s pretend I want to buy ADA, but I think it will keep going down and I think I can get it for a better price.  Currently it is trading at 2.20 but I think it will keep going down for a while before starting to come back up.  I would put in a trailing buy order, it might look something like this:

  • Trigger Price: 2.18
  • Trailing Price: 2%

With this order, when ADA hits 2.18 it will put a limit order in for a 2% increase.  Now why is this a good order, because it will trail the LOWEST price by 2% until it has gone up by more than 2%.  So for this order I would be able to buy ADA for 2.2236 or lower.  If ADA continues to go down and the lowest price before going back up was for example 2.10 then it went up 2% I would then be able to buy ADA at a price of 2.142 and I would have gotten a better price.  

The exact same thing can happen with a Trailing Sell or sometimes people call it a Trailing Stop Loss.  If I bought ADA for 2.20 and I want to sell it if ADA drops by 2% then I can put a Trailing Sell for 2.30.

  • Trigger Price: 2.30
  • Trailing Price: 2%

So once ADA hits 2.30 it will put a limit sell order that will trail the highest price by 2%.  So if ADA hits 2.30, and then drops to 2.29 it will not sell.  If it jumps up 2.45, it will then have a new price of 2.4019 that will be the limit sell price and you would have gotten a better price for the coins.  

I personally had trouble wrapping my head around the idea after reading how it works, however CLICK HERE for a great video that explains the concepts with visuals.

Stop Price Vs. Limit Price – What is the difference?

Now that we have an idea about a stop order and a limit order we can talk about the differences between the two orders.  The difference is how the order is executed.  So a stop order is basically a trigger order.  When used alone, it will act as a market order and you will get coins for an average price.  But a limit order when used by itself will only sell or buy at that price or better. 

Limit Price Vs. Market Price – What is the difference?

Now the next questions is why would I use a limit order instead of just a market order.  So if you want to get into a trade or out of a trade as fast as you can, you would want to use a market order.  It will buy and sell at whatever the current price of the coin is.  So if you say you want to buy 1 coin of ADA at a market order, and it is currently trading at 2.20.  You might get the coin for 2.20, 2.21, 2.19 or any type of number in between.  But if I were to put a limit price in for 2.20 that means my order would only buy ADA for 2.20 OR BETTER. You might get the coins for 2.19, 2.18 or 2.20, but not more.

Stop Loss Vs. Stop Limit – What is the difference?

Stop Loss and Stop Limit are two orders that can be confused with each other at times.  What I want to highlight is both orders have a stop in them, so there is a trigger price, but the second part of the order is the key.  With a stop loss order, the stop price will be triggered and since it is not a limit order it will be made into a market order.  So a Stop Loss order will get sell the coins as soon as the price is triggered for market value.  A stop limit order has a limit order built into the order.  So again, the stop price will be triggered and that will then open up a limit order that you will have set previously.  The coins will not be bought or sold UNTIL the limit price has been met.

My Order Didn’t Work – WHY?!?!

With trading we as humans want to know each and every part of trading.  We are human, even if we are trading with a bot, there is still a human interacting with it somehow, someway.  With that being said, at times the orders do not work like “we think they should”.  If I were trading ADA and I had a stop loss order at 2.20, and a whale came in and knocked out all of the orders between 2.20 and 2.00.  Remember that a stop loss sells at the market value, so I would sell my ADA for 2.00 instead of 2.20.  The same can also happen with any order that has a stop with it.  Remember how I have said that a stop order acts like a trigger, so if the stop order price isn’t hit, then the order will not be executed.  Here is another example, I want to put a Stop Buy order to buy ADA.  I have a Stop Order of 2.18 and a Limit buy for 2.20.  However, the price of ADA may skip over 2.18 and therefore my order would not be triggered.

Happy Trading – Staying Green!

So while you are moving forward in your cryptocurrency journey I am hoping you will be able to use some of these orders.  Again, these orders are there to help you get the best price for your coins.  They are also there to help protect your investments.  I do believe they can and will help you with your trading, however using them correctly is also an important part of the process as well.