Stop loss orders can be used to limit losses or exit profitable trades.
Overview
- Stop loss 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 loss orders are a type of market order that are triggered when a stop price is touched by the market price. As a result, they are not added to the order book.
- Once a stop price is reached, the stop loss order turns into a market order and is executed immediately.
- Once a stop loss order is fulfilled, the trader is known as a 'market taker' - since they are taking liquidity off the order book (traders are charged a fee for doing so).
Stop Loss Order Example
Suppose you go long on bitcoin with 10,000 BTC-PERP contracts at a price of $10,000. If you want to limit your downside for this trade, you can set a stop loss order at $9,900 to limit your loss to approximately $100. If the market price declines to $9,900, then the stop loss order at this price will be executed and you'd realise a loss of $100.
However, you can also use a stop loss order to sell at $10,500 once the price rises to $10,550 to profitably exit the position. If the market price eventually turns south and hits your stop loss at $10,500, the order is executed. The position of 10,000 BTC-PERP contracts is sold, generating a profit of $500.
How to Use a Stop Loss Order
Stop loss orders can be executed on the Interdax platform using the order panel on the upper left-hand side.
Click on ‘Stop Loss'.
Select between a stop loss order to buy or a stop loss order to sell, then choose your stop price. A stop loss order allows you to buy or sell at market once a specified price is reached (which is known as the stop price).
The process for a entering stop loss order for a long position is shown below:
Use the slider to change your stop price. You can also enter a desired price into the trigger price box:
Once you have chosen your position size and direction, you will be asked to confirm the stop loss order.
A stop loss order is not added to the order book once confirmed. You should see the stop loss order appear in the ‘Conditionals’ tab of the positions panel at the bottom of the interface:
The quantity or stop price can be amended by clicking on the pencil icon. To cancel a stop loss order, click on ‘Cancel’.
The stop loss order can also be cancelled or adjusted from the chart:
An active stop loss order is executed automatically when the market price reaches the stop price, and the market order is sent.
Stop loss orders can be used to limit your losses as a stop loss or to lock-in profits, since you can only set a stop loss order to buy above the current market price and a stop loss order to sell below the current market price.
With stop loss orders, you will be able to leave your trade running until your stops are hit and requires less monitoring of the price chart. A stop loss order turns into a market order once the stop price is hit and the trader is then a “market taker” - taking liquidity from the order book and paying a fee to do so.
A stop loss order avoids the issues associated with limit orders, such as a partial fill of your position when the stop price is triggered. But since a stop loss order is a variant of a market order, the position may get filled at a slightly worse price than your stop price.