Stop limit orders can be used to limit losses or exit profitable trades, once the mark price reaches the specified limit price.
- Stop limit orders can be used to limit your losses as a stop loss order and lock-in profits from a trade once a certain price is reached.
- Stop limit orders are a type of limit order that are triggered when the mark price (=index price) reaches the trigger price, at which point a limit order is added to the order book.
- Once the trigger price is reached, the stop limit order turns into a limit order and is executed when the mark price reaches the limit price.
- Once a stop limit order is fulfilled, the trader is a “market maker” if it is filled as a resting order on the book (since they are providing liquidity to the order book). Market makers do not incur any trading fees for adding liquidity.
- If the stop limit order removes a resting order, then the trader is a "market taker".
Stop Limit Order Example
Suppose you go long on bitcoin with a position of 10,000 BTC-PERP contracts at a price of $10,000. You can use a stop limit order to protect your gains and limit your losses. For example, you can set a stop-limit sell order with a trigger price of $9,900 and a limit price of $9,880.
Once the mark price (=index price) reaches the trigger price of $9,900, the limit order at $9,880 is placed onto the order book. Once the mark price reaches the limit price of $9,880, the limit order is executed and you exit the trade with a loss of approximately $500.
However, if the market moves higher once you enter a long, you can move the stop-limit sell order higher. Suppose the price increases to $10,500, then you can move your stop-limit sell order higher so that the trigger price is $10,200 and limit price is $10,180. If the market moves higher, you can continue to move your stop limit order up. If the market turns downward and mark price touches $10,180, then you will exit the market at the limit price of $10,180 and your profit will be approximately $180.
Similarly, suppose you go short on bitcoin with a position of 10,000 BTC-PERP contracts at a price of $10,000. A stop-limit buy order could be set with a limit price of $10,150 to limit your risk to $150. If the mark price continues to move downward after entering a short position, then you can move the stop limit buy order lower to ensure that you exit the trade with a profit if the market reverses.
If the mark price moves to $9,000, you could move your stop-limit buy order to $9,200, with a limit price of $9,200 and a trigger price of $9,150. Once the price moves above the trigger price of $9,150, the limit order at $9,200 is added to the order book. If the mark price rebounds from $9,000 and reaches $9,200, the trade will be exited and your profit will be approximately $800.
How to Use a Stop Limit Order
Stop Limit orders can be executed on the Interdax platform using the order panel on the upper left-hand side.
Click on 'Stop Limit' as shown in the video below:
You can select between a buy stop limit order or a sell stop limit order.
For instance, if you had a long position on BTC-PERP, you could:
- Set a sell stop limit order below the current mark price to stop the trade and limit any losses.
- Set a stop limit order to sell above your entry price if the market moves in your favour, to lock in profits if the market reverses.
There are two prices associated with stop limit orders; the limit price and the trigger price.
The trigger price is the price at which the limit order is activated. The limit price is the mark price at which your order is fulfilled. (Note: The trigger price and the limit price can be equal).
The two sliders in the order panel can be used to set these prices once you've selected 'Stop Limit':
Once you have selected your limit and trigger prices, you can hover over 'Set Sell Trigger' to confirm details of the order. A tooltip will be displayed as shown below. In this example, 100,000 contracts will be sold at a price of $9,880 and the stop limit order is triggered once the mark price reaches $9,900 or below.
Once you click on 'Set Sell Trigger', a confirmation screen will appear (displayed below):
Once confirmed, the stop limit order then appears on the 'Conditionals' tab. You can click 'Cancel' to cancel the stop limit order.
The limit order is only placed onto the order book once the mark price touches the trigger price. If the mark price reaches the trigger price but the limit price remains untouched, your limit order will remain open.
The stop limit order is also displayed on the trading chart. You can drag the stop limit order higher or lower to adjust the risk of a position.
For instance, if you are in a long position, you can move the stop limit order higher to reduce the risk of the position as shown below:
Stop limit orders can be used to limit the losses of your trade by buying (or selling) at a higher (or lower) price than the current mark price, which is useful for trading breakouts. You will be able to leave your trade running until your stops and limits are hit and requires less monitoring of the market as compared to using a market order to exit a trade.
A stop limit order suffers from the same issues as a regular limit order. For example, your stop limit order may not be filled at all or only partially filled, especially if there is a rapidly rising or falling price. Be aware that the limit order might not get filled as the market passes through it if the market is moving rapidly (in this case, you can use a market order).