In this lesson
- recap the market and limit order
- understand the difference between a stop-market and a stop-limit order
- learn the OCO and the trailing stop – and their weak spots
From the first course you know the market order (right away, at the best available price) and the limit order (only at your price or better). With them you buy and sell. Protecting a trade and planning an exit, however, need other order types.
Stop orders: asleep until the price arrives#
A stop order waits for a trigger price. Until the price reaches it, nothing happens. Then it wakes up – and what it does next depends on the type:
| Order | Once the trigger price is reached… | Advantage | Risk |
|---|---|---|---|
| Stop-market | sends a market order | almost sure to fill | in a fast market at a worse price (slippage) |
| Stop-limit | sends a limit order with your limit price | you know the worst price | if the price jumps past the limit, it does not fill at all |
A typical stop-loss is a stop-market order. Imagine you have a stop-loss at 62,000 and the market crashes like on 5 March 2024 – 14.5% in four hours. The stop-market fills, say at 61,700. A stop-limit with a limit of 61,900 may not fill at all in such a drop – and you stay in the trade you wanted to close.
For protecting against losses, a stop-market is usually better. A worse price is a smaller evil than no exit.
OCO: one cancels the other#
An OCO (one cancels the other) links two orders: when one fills, the other is cancelled automatically. Typically a take-profit above the price and a stop-loss below it. You do not have to watch which comes first – and you will not end up with a forgotten stop-loss left hanging after the profit target filled, which later "throws you out" of a new position.
Trailing stop: a stop-loss that moves with the price#
A trailing stop has no fixed price but a distance – for example 5% below the highest price since the trade was opened. When the price rises, the stop moves up with it. When it falls, the stop stays where it is.
Example: you buy at 60,000 with a 5% trailing stop. The stop is at 57,000. The price rises to 70,000 – the stop moves to 66,500. Then the price falls to 66,500 and the order takes you out with a profit.
The weak spot: in crypto, swings of 5% are common even in the middle of a strong trend. A trailing stop that is too tight will throw you out at the first bigger wave.
Every exchange does it a little differently
The names, the available order types and what exactly happens when they trigger differ between exchanges. Before you use a new order type with real money, read the exchange's help pages and try it with a small amount or on a demo account.
Common myths#
- "A stop-limit is better because I know the price." You know the price – if it fills. In a crash it may not.
- "A stop-loss guarantees an exact loss." In a fast market the loss can be bigger.
- "A 2% trailing stop is safe." In crypto it will throw you out before you can blink.
Summary
- Stop orders wait for a trigger price; a stop-market then sells at market, a stop-limit only up to its limit.
- For protecting against losses a stop-market is usually better – a worse price is a smaller evil than no exit.
- An OCO links a profit target and a stop-loss: one fills, the other disappears.
- A trailing stop moves with the price; in crypto it needs plenty of room.