Stop Loss meaning, Stop Limit, Order Types (Limit order and Market Order) in Cryptocurrency Trading for Beginners
Cryptocurrency trading for beginners can be confusing when it comes to understanding the meaning of some terminologies used in trading. If you have been trading stocks, you should find this similar but the difference is that Cryptocurrency trading is tied to another coin and not to a dollar as in stocks. In trading of stocks, one product is tied to a dollar and not tied to another product but in cryptocurrency, you have the options of trading one coin with another with the aim of accumulating the desired coin before withdrawing it into fiat (dollar). Before you learn the skills or techniques of trading cryptocurrency, it is good you know about the terminologies of trading in Cryptocurrency.
Market price in Cryptocurrency refers to the current price of a coin. The market price is not fixed as it keeps changing. When you want to buy or sell at the market price, your order must be exhausted or completed first before the price changes. The market price is determined the forces of buying and selling; the order of the seller willing to sell lowest among others will be completed first if there is a corresponding buyer who is willing to buy at that price.
Market order is an order to buy a coin at the current market price. When you want to sell large amounts of coins at once, using the market order is the best (when the market price is favorable for you to sell that is, if selling at the market price will give you profits). Because the market price changes rapidly, when you place an order at the market price, your order will be executed at different prices depending on the amount of coins you are willing to buy. In a market order, you dont set a price but you only set the amount you want. In a market order, you may not know the number of coins you will buy.
Market order examples
Let us say you want to use 100 Ethereum (ETH) to buy Litecoin (LTC). When you place a buy order with 100 ETH, you may have 5 persons willing to sell their LTC. One thing to note is that the 5 people may not all sell at the same price and the amount of LTC that one of them may be willing to sell may not reach the amount you want to buy this means that you have to buy from several people who are willing to sell at different prices for you to be able to buy the amount of LTC you wanted. When you place a buy order for LTC at the market price your order will be filled at different prices.
Sometimes when you place a market order, you can get one person who also wants to sell at the same price and whose amount of coins is equal to what you ordered for or the amount may even be more than what you order for in such an instance, your order will be completed with exact amount of coins you ordered and at the same price (there will be no variation in the prices since a single person has the amount you are ordering for).
A limit order is a type order in Cryptocurrency whereby you intend buying or selling a coin at a certain price automatically whether you are online or offline. What this means is that, when you logged in, the price of your desired coin is at a certain price (the current price which is called the Market price) and you intend buying when the price goes down to a specified lower value (your Buy Limit Order) or you intend selling when the current price goes up to a specified value (your Sell Limit order). The limit order helps you to order for a coin to be bought or sold when your desired price has been reached and it also helps you to know the number of coins you will buy when your order is completed because the price you set is what will be placed unlike the market order which the prices may be filled differently. With the limit order, you dont have to be online to be checking whether your desired price has been reached as it becomes tiring and boring; the limit order therefore helps to automate the process of buying and selling in Cryptocurrency trading. Therefore, there is the Buy Limit Order and Sell Limit Order which will be explained below.
Sell Limit order
In sell limit orders, the individual with the lowest price will first be served before others with higher prices. What this means is that, when there are many people willing to sell a specific coin, they all want to sell at different prices; what is done is that, the person among sellers who has the lowest price will sell all his coins before the person next to him who has the next higher price. The coins of the seller willing to sell at the lowest price than all sellers will be placed as the current market price and such an order must be completed before others can sell theirs who want higher price for the same coin.
Buy Limit order
Buy limit is an order to buy a coin at a specific price when the market price reaches the value you set. When you want to buy a coin when the price drops down to a certain value, you will then set your limit order at that price so that the coin will be bought at that price even when you are offline. The whole process is automated by your exchange so you dont have to worry (even while sleeping, your order will be executed if the price of the coin drops to the value you set). If the price of the coin does not drop to the value you set, your order will not be completed.
In a buy limit order, the order of the buyer with the highest price will first be completed this means that among buyers, the person willing to buy higher will be able to buy first before other buyers who want to buy at lower prices.
What is a stop loss order (What is a stop limit order)?
A stop loss or stop limit order is an to place an order at a specified price when the value you set has been reached. This is different from a limit order because you are giving conditions. A stop loss or stop limit order may help you to make profit and may also help you to buy at a lower price this is explained further below.
In some exchanges, stop loss is used while on Binance Exhange that I do use, Stop-Limit is used. Whether it is stop loss or stop-limit order, they all have the same function and are used the same way only the name varies.
How a stop loss order or stop limit order may help you make more profit
Assuming you think the price of a coin may still go up (above the current market price) and so you want to make more profit even though the current price has given you profit but you still want more profit and at the same time you dont want to run at a loss should the price go down instead, you can make use of the stop loss order.
Another instance is when you want to buy a coin but you think the current price may still go down further so you want to buy at a specified value but you dont want to be wrong should the prices go up instead you can still place a stop loss order or stop limit order.
Stop loss Example
Let us say you bought Tronix (TRX) coin at 0.00005 ETH each with the hope of selling them when the price goes up; you waited and the prices went up to 0.00008 but you still want to make more profit because you think the price may go up higher than the current 0.00008 ETH; you will then place a stop loss order or a stop limit order so that you can sell your coins even when the price happens not to go up but instead go down. You will now set your Stop value at 0.00007 and your Limit value at 0.00006. What this means is that, should the current price of 0.00008 ETH drops down to 0.00007, please help me place an order to sell my coins at the price of 0.00006 ETH. Why is this done like this? A stop loss helps you to reduce your loss. It helps you to cut your losses when the price is droping.
At first, you thought the price may still go up further but the price instead went down. So what a stop loss does is to help you stop the loss when the price drops to a certain level (the stop value you specified). If the price had gone up just as you predicted, then your stop loss order will not be executed and for you to take profit, you need to cancel the stop loss order and place a limit order to sell at the high price you predicted or sell at the market price (if the market price is okay by you).
If you had sold at the intitial price of 0.00008 that you first saw, your profit would have been 0.00003 ETH but because you thought the price would go up you decided to place a stop loss order so that if you had been correct, you would have sold higher if you had come online to find the price at 0.00009 (your profit would have been 0.00005 ETH). If you were wrong and the price falls down to 0.00003 at the time you came online, your stop loss order would have prevented you from losing 0.00002 ETH ( from initial 0.00005 ETH when you bought and now 0.00003 ETH when you came online) the stop loss order would have prevented you from losing by placing an order at 0.00006 ETH to sell your coins at the time the price falls to 0.00007 ETH (leaving you with a profit of only 0.00001 ETH even though the pricewent down you were able to take little amount of profit)
Why should your stop value be higher than your limit value?
In the example given above, you can see that I decided to set the Stop Value (0.00007 ETH) hgiher than the Limit value (0.00006 ETH) this is for a good reason because the price of coins may rapidly fall down to an extend than before your stop loss order is even placed, the price must have fallen past the value you set. This means that if I had placed the limit value to be 0.00007 ETH just as the stop value, then should the prices fall rapidly and gets to 0.00007 ETH, before my sell order will be placed, the price must have been at 0.00006 ETH this is the reason why it is always good to place the stop value higher than the limit value in a stop-limit order (or stop loss order)