How do stop-loss orders work? (Limit+Stop)

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Let’s pretend a hypothetical situation and say you have bought bitcoins for 5000, the price of bitcoin is rising in your favor and the current price of bitcoin is 5500. Now you wish to secure your profit in case the growth stopped and the trend changed to a downtrend with a decreasing price. Here are your options:

A. Due to your analytics or a pure guess, you plan to sell bitcoin for 6000 but you wish to secure yourself against a loss in case of a sudden change of trend. You will use the „Limit+Stop“ SELL order type in Tradeview (menu TRADE), set the amount of bitcoins you wish to sell, set the Price to 6000 and the Stop price to anywhere between 5500 and 5000 (to stay in profit). You can also set the Stop price to a price below 5000 but in that case, your bitcoins may be sold for a price lower than for what you bought them for but at least you limit a potential loss.

B. You don’t really want to sell your bitcoins as you wish to hodl them for a long time but still you want to secure yourself against a potential loss. Again, you will use the „Limit+Stop“ SELL order type in Tradeview but this time you will set the price to some really high number like for example 500000, and the Stop price anywhere below the current price. In case of a continuous uptrend, your bitcoins won’t be sold unless the bitcoin price goes all the way up to 500000. However, they would be sold in case the price would go down and would hit your Stop price.

C. You want your Stop price to grow with the growing price of bitcoin. This option is called Trailing stop and you can find it in the „Limit+Stop“ form as an optional „Trailing“ checkbox. When you turn the „Trailing“ on, your Stop price will automatically increase with the increasing price of bitcoin. Let’s say you have set the Stop price to 5100 (which is 400 less than the current price of 5500) and the future price keeps growing up to 5800 (a 300 increase from current price). Your Stop price will automatically adjust to 5400 (5100+300). If the future price than stops growing and from 5800 starts moving down to 5200, your Stop price will trigger @5400 with an automated sell order. For comparison, with a Trailing stop, your bitcoins would be sold somewhere around 5400 but with a Stop price fixed @5100 (no Trailing), you would still own bitcoins because the price has not gone all the way down to 5100 so far. 

Limit+Stop option on Coinmate.io
Limit+Stop option on Coinmate.io

The same examples apply when you sold bitcoins, you expect the price to go down but want to insure yourself against a trend opposite to your expectation. Let’s say you sold bitcoins for 6000 and you plan to buy back at 5000.  You will use the „Limit+Stop“ BUY order, set the Price to 5000 and the Stop price for example to 6500. Now if the trend goes opposite to your expectation and instead of going down to 5000 it keeps moving to 7000, the stop order will automatically buy back your bitcoins at around the price of 6500.

Please note that the Stop price is only a trigger and does not guarantee that your bitcoins will be bought or sold at exactly that price. Let’s say for example that current price is 5500, the best bid is 5499 and best ask is 5501 and you have a sell stop price set @5100. At a situation when the last traded price hits 5100 and at that situation the best bid is 5098, the best ask 5102, an automated market sell order will trigger because you have set your stop price to 5100.

It will, however, start selling at 5098 because that is the current best bid and it will keep selling until the whole amount in your order is sold. Depending on the amount and the situation on the market, your order may be sold for an average price that is even lower, for example at around 5097.


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