Stop market orders can be used to limit losses or exit profitable trades.
- Stop market 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 market 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 market order turns into a market order and is executed immediately.
- Once a stop market 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 Market 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 sell stop market order at $9,900 to limit your loss to $100. If the market price declines to $9,900, then stop order at this price will be executed and you realise a loss of $100.
However, you can also use a sell stop market order at $10,500 once the price rises to $10,550 to exit your position. If the market price eventually turns south and hits your stop price at $10,500, your order will be executed. The position of 10,000 BTC-PERP contracts will then be sold, generating a profit of $500.
How to Use a Stop Market Order
Stop market orders can be executed on the Interdax platform using the order panel on the upper left-hand side.
Click on ‘Stop Market’.
Select between a buy stop market order or sell stop market order, then choose your stop price. A stop market 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 stop market order is shown below:
You can use the slider to change your stop price.
Once you have chosen your position size and direction, you will be asked to confirm the stop market order.
A stop market order is not added to the order book once confirmed. You should see the stop market order appear in the ‘Stops’ tab of the positions panel at the bottom of the interface.
To cancel a stop market order, click on ‘Cancel’.
An active stop market order is executed automatically when the market price reaches the stop price, and the market order is sent.
Stop market orders can be used to limit your losses as a stop loss or to lock-in profits, since you can only set a buy stop market order above the current market price and a sell stop market order below the current market price.
With stop market orders, you will be able to leave your trade running until your stops are hit and requires less monitoring of the market. A stop market 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 market 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 market order is a variant of a market order, the position may get filled at a slightly worse price than your stop price.