A stop order is an order to buy or sell a certain amount of an asset that is activated only after the market price reaches the level specified by the trader. Until that moment, the order remains in a pending state and does not affect the market. When the price touches the stop level, the order turns into a market order (or a limit order, depending on the settings) and is executed at the available price — often at the specified price or worse due to slippage.
The main purpose of a stop order is to automate trading decisions and control risk. It frees the trader from the need to constantly monitor quotes and allows action scenarios to be set in advance. There are several varieties: a buy stop order, a sell stop order, as well as a stop-loss to limit losses and a take-profit to lock in gains.
Why stop orders are used
- Limiting possible losses in case of an adverse price move;
- Protecting accumulated profit;
- Entering a position when an important level is broken;
- Discipline and reducing the influence of emotions on trading.
A stop order is a basic capital management tool that is actively used both on cryptocurrency exchanges and on traditional markets.
