It is designed to help traders limit potential losses and protect profits in volatile markets.
A stop-limit order consists of two parts: a stop price and a limit price. The stop price is the price at which the order becomes active, and the limit price is the minimum price that the trader is willing to accept for the asset.
Here’s how it works:
- The trader sets a stop price and a limit price for their order.
- When the asset reaches the stop price, the order becomes active.
- Once the order is active, it is converted into a limit order and executed at the specified limit price or better.
For example, let’s say a trader holds 1 Bitcoin and wants to limit their potential losses in case the price drops. They can set a stop-limit order with a stop price of $55,000 and a limit price of $54,500. If the price of Bitcoin drops to $55,000, the order becomes active, and it is executed at the limit price of $54,500 or better.
A stop-limit order can also be used to protect profits. For example, if a trader holds 1 Bitcoin and wants to sell it if the price reaches $60,000, they can set a stop-limit order with a stop price of $59,500 and a limit price of $60,000. If the price of Bitcoin rises to $59,500, the order becomes active, and it is executed at the limit price of $60,000 or better.
It is important to note that stop-limit orders may not always be executed, especially in highly volatile markets, where the price can fluctuate rapidly. Additionally, traders should always consider the potential risks and benefits of using stop-limit orders versus other types of orders when trading cryptocurrencies.