Stop limit orders can be used to limit losses or exit profitable trades, once a specified price has been reached.
Overview
- 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 market price reaches the stop price, at which point a limit order is added to the order book.
- Once a stop price is reached, the stop limit order turns into a limit order and is executed when the market 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 gain a rebate 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 stop price of $9,900 and a limit price of $9,800.
Once the price reaches $9,900, the limit order at $9,800 is placed onto the order book. Once the market price reaches $9,800, your limit order is executed and you exit the trade with a loss of $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 to $10,200. If the market moves higher, you can continue to move your stop limit order up. If the market turns downward, then you will exit the market at $10,200 and your profit will be $200.
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 at $10,150 to limit your risk to $150. If the market continues to move downward, then you can move the stop limit buy order lower to ensure that you exit the trade with a profit.
If the market moves to $9,000, you could move your stop-limit buy order to $9,200, with a limit price of $9,200 and a stop price of $9,150. Once the price moves above $9,150, the limit order at $9,200 is added to the order book. If the market rebounds from $9,000 and reaches $9,200, the trade will be exited and your profit will be $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'.
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 market 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 a stop limit order; the limit price and the stop price.
The two sliders in the order panel can be used to set these prices. The stop price is the price at which the limit order is then activated. The limit price is the price at which you wish to fulfil your order. The stop price and the limit price can be the same.
Once you have selected your limit and stop prices and click on 'Set Sell Stop', a confirmation screen will appear (displayed below).
Once confirmed, the stop limit order then appears on the 'Stops' tab. You can click 'Cancel' to cancel the stop limit order.
Your limit order is only placed onto the order book once the stop price is triggered. If the stop price is reached but the limit price remains untouched, your limit order will remain open. The stop limit order is also displayed on the Trading Chart panel.
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 market 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).