Stop orders guide for cryptocurrency trading - how & when to use them

If you want to learn to trade cryptocurrency, then you’ll likely want to begin with learning about order types. While the market order type is good enough for buying and holding, it’s likely that you’ll want to learn about other types if you plan to day trade or swing trade.

Using alternative order types can help you to have a better control over your crypto orders. This can help you to earn more profit from your sells and get better deals on your buys. In this article, we’ll be talking about a very useful order type called Stop orders. What are they though and how do you use them when trading cryptocurrency? Let’s talk about what you need to know to get started with them!

Stop orders in cryptocurrency explained

While there are several different types of stop orders, the same basic principle applies to all of them. The stop is a trigger, and this trigger allows you to be more accurate in your cryptocurrency trading process. Once the trigger price is reached the stop order will be executed as a normal limit order.

When using this type of order you can protect yourself from big price drops that might end up rendering your crypto trades no longer profitable. It’s a good idea to use these if you need to protect your trades from big price swings.

What types of stop orders are there in crypto trading

Stop Limit
A stop limit order will be executed at a specified cryptocurrency price or better. This is useful for entering or exiting at a certain rate but not any lower if it goes past that point.

Stop Market
A stop market will be executed at a specified price. However, since it turns into a market order once the stop is reached it always fills. This means there’s no risk for you to miss the price frame and not having your crypto order executed.

Stop Loss
This type of order is one of the most popular with cryptocurrency day traders. It stops your loss by activating once an asset falls below a certain point. When the trigger is reached your asset will liquidate in order to avoid loss.

How do stop orders work

Stop orders can be set in a variety of ways, but they all function on a trigger. If you were to set a stop order for a specific crypto price, then when that price would be reached, your buy or sell order would then go into effect.

Once the trigger takes place, your stop order will turn into whatever another order type is tied to it. This could be a limit or market order for example, and then the order will be filled as if it was one of those order types. However, you would get far greater functionality thanks to the stop than you would just be using one of the standard order types.

Example of stop order

Jimmy is currently trading a coin which he believes has a great potential. However, he also wants to have a little insurance in case he’s wrong about which direction the asset is headed.

He decides to put a stop loss order so that he can limit his losses if things don’t quite go his way. Jimmy sets his stop-loss at 10% of his current cryptocurrency value and sits on this order.

Soon, the price of the asset experiences a traumatic event and it starts to fall. The coin loses 30% of its value within a matter of minute, but thanks to his stop-loss order Jimmy has lost only 10%.

While he did still lose money on the trade, he lost a lot less than he would have without the stop loss. Now he has the money to try again and a chance for profit on his next crypto trade.

Stop order to sell

If you were to enter a stop order for selling a cryptocurrency, then your order would be executed once the price of the asset had reached a certain threshold or better. However, if you had a stop loss type order activated, then it would liquidate it below a certain percentage of your loss to “stop the loss”.

Stop order to buy

If you wanted to buy a cryptocurrency on stop, then you could set this type of order. Your order would be executed upon the price of the coin or token reaching your desired price. Then you can purchase using a market order. This might be useful if you were waiting for a certain amount of upward momentum before making a purchase.

Can a stop order be reversed

If your stop order has not been executed yet then you can cancel it just like any other order. If your stop order has already triggered and the sale took place then there is nothing you can do. You’d need to quickly buy crypto back at a market price and hope for the best in this scenario.

When to use a stop order

There are several cases when a stop order might be appropriate. However, the stop loss is one of the most common. Cryptocurrency day traders often use this when they want to limit how much they can lose on a potential trade.

If you wanted to do this then you would normally set a level of loss which was acceptable to you should things head south. Many people choose 10% as their stop loss, but you should choose whatever you’re willing to lose. That caps your loss for a bad trade at 10% rather than a higher and more catastrophic number.

However, you could also do what we talked about earlier and use a stop to buy assets that are picking up in momentum. If you do it correctly this could put you into an excellent position to make a profit as things are heading up, but this can be pretty hard to get right so don’t put all your cash into one trade here.

Stop order vs Limit order

A stop order can be tied to multiple order types and operate on a trigger. A limit order can perform a similar function, but it is not guaranteed to be executed. If you want to be 100% certain that you could limit your losses, then a stop order that further turns into a market order will guarantee the order will be completed.