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Advanced Trading: Limit Orders And Stop Orders

December 27, 2020
10 min
Advanced Trading: Limit Orders And Stop Orders
Beginner
You will learn

    For those already familiar with traditional trading, the terms we are about to introduce are nothing new: Limit Orders and Stop Orders.

    Those who have gained some experience in buying and selling cryptocurrency and are beginning to understand some patterns in price behaviour will feel the need for more advanced and smarter orders.

    Trading needs precise and timely tools. We can’t afford to stay connected to the exchange and control the market all day. We need a better solution to catch our desired price or protect ourselves from losses.

    These two categories of orders match time and price indications in a precise way, to buy and sell at the most advantageous moment. They are therefore advanced buying and selling tools compared to the Market Order

    Market Orders

    The simplest purchase or sale order is the Market Order, i.e. the order at the current market price. When you place a market order you ask the exchange to buy or sell at the next available market price, whatever it is.

    The price available the instant after placing the order may differ even significantly from the price displayed before the order is placed. This is because cryptocurrency is a very volatile asset.

    For those who have no experience in trading, and are not aware of how the crypto market works, the Market Order is the most immediate way to buy or sell. When we are trading on a basic exchange we are using a market order without even knowing it.

    We can therefore define it as the standard way of buying and selling cryptocurrency.

    For experienced traders, the market order is only used in extreme cases. In particular, it is used when the market moves very fast and you need to trade immediately. The entry or exit price is then no longer a priority, instead, timing comes first.

    Memo

    The Market Order is used to buy or sell immediately at the best available price.

    Advanced Trading Orders

    In order to understand the mechanics of these orders, it is essential to have already processed the notions of support and resistance.

    These orders are usually used according to the trend lines that traders identify on price charts.

    Limit Orders

    How do limit orders work?

    The limit order is used to set the maximum price at which you are willing to buy and a minimum price at which you are willing to sell.

    Only when the cryptocurrency reaches the limit price, i.e. the price you set, will the order be filled.

    It is possible that your order will intercept an even more advantageous price than the set price. This occurs if the market moves quickly and you place an order very close to the market price.

    For example, if BTC’s price is €12,500 and you set a limit order at €12,450 but while placing the order the price reaches €12,400, it will be executed instantly (like a Market Order) at this last price.

    Unlike Market Orders, your order does not necessarily have to be filled. There is, in fact, no guarantee that the cryptocurrency will ever arrive at the price you have chosen. In this case, the order will simply stay pending until you cancel it.

    Limit orders do not expire and can be cancelled manually at any time.

    Memo

    The limit price is the maximum price you are willing to pay for a cryptocurrency or the minimum price at which you are willing to sell it.

    When do I use limit orders?

    Limit orders tend to be used in two scenarios:

    1. I don’t often look at charts, but if the opportunity arises, I would like to be sure to buy or sell at that price.
    2. I intercept a change in the trend of a price. Therefore I am sure to detect a rebound on the support or resistance lines.
    1. Seize the opportunity

    Even if I do not regularly follow the markets, I am informed enough to formulate hypotheses on prices movements. I can therefore exploit to my advantage the limit orders, setting profitable price limits in the case in which my forecasts are correct.

    1. Support & Resistance

    The limit order applies especially when I believe that the cryptocurrency price will reverse its trend in the short term.

    This frequent change in trend, similar to a price bounce, is associated with the presence of support and resistance lines.
    When the price of a cryptocurrency continues to fluctuate always in the same range of price and it does not succeed to rise, we say that it’s not strong enough to “break the resistance”.

    To speculate on the growth or decrease in the price of a cryptocurrency we can use:

    • analysis of price charts
    • depth chart
    • market news

    The demand and therefore the price can increase if, for example, the cryptocurrency acquires prestige or utility through important partnerships or new use cases. Or we can compare the buying and selling walls by reading the Depth Chart, as we will see in the next article.

    Setting limit orders

    In limit orders, the price we enter, i.e. the price at which we want to buy or sell, must always be more convenient compared to the market price, otherwise, the exchange won’t accept it.

    Once the analysis of the market, the price and our forecasts have been made, all that remains is to place the order.

    Purchase

    Let’s picture this scenario. Bitcoin is at 9.500€ and we think it will drop to 8.900€ in a few days. From our analysis, we are sure that this price drop is part of the normal fluctuations of the currency. Therefore, it will not fall below €8,900 and will only touch the support line, without breaking it.

    We can take advantage of this situation if we want to buy bitcoin by intercepting the best moment in the short term.

    By setting a Buy-Limit Order we ask the exchange to buy bitcoin only when it arrives close to the price of 8.900€. To make sure it will be filled, it is not advisable to choose the absolutely lowest price, but rather something around 8.890€.

    Sale

    Let’s see the opposite case: a Sell-Limit Order. Bitcoin is always around 9.500€. Your analysis suggests that it will grow. However, you believe that it will not be able to break the resistance at €10,000 that you have identified.

    To make a profitable sale you can place a sale limit order in the area of 10.000€, for example at 9.990€, to be sure that in the short term it will reach it.

    Stop Orders

    How do stop orders work?

    Stop orders are used to protect your capital in the event of a collapse in the price of the asset. Or to guarantee a good return in the event of a sudden rise in price.

    Only when the cryptocurrency reaches the stop price, i.e. the price you set, will the order be filled.

    When do I use stop orders?

    Stop orders apply when the price trend of a crypto is believed to continue, by breaking the resistance or support lines.

    If this happens, the stop order will be triggered, otherwise, it will remain pending and may eventually be cancelled.

    1. Profit

    Let’s go back to the previous example. Bitcoin is at 9.500€ and we are sure it will spike and break the resistance of 10.000€. So I choose to place a stop order to buy at a price higher than the resistance price, for example at 10.050€.

    Why buy at a higher price? Usually you buy at the lowest possible price.

    The answer is that if the price rises above resistance, there is a high probability that it will continue to rise. So you’ll buy at a slightly less convenient price to get a higher profit later on.

    limit orders

    2. Protection

    Although they may not necessarily be executed, stop orders can ensure that the trader does not lose large amounts of money at a time when the market seems to be collapsing. In this sense, the limit order will serve as a parachute.

    Has bad news come out that will bring down our asset? Are we seeing the beginning of a particularly negative trend?

    It is time to set a Sell-Stop order, by selling at a pejorative price to avoid losing even more money. However, it is not sure that the collapse will actually happen. If at the support line, the price bounces back, the order will not be activated and we will not lose anything.

    There is also the possibility that the price falls past a presumed support line and the order is activated, but then the price immediately goes back up. In this case, we will have sold for nothing at a price that is not convenient.

    limit orders

    When not to use a stop order

    Before using a stop order, investors should consider the following. Short-term market fluctuations can trigger a stop order, so a stop price should be selected carefully.

    The stop price is not the guaranteed execution price for a stop order. The stop price is a trigger that causes the stop order to become a market order, i.e. to be filled. This is a subtle but important difference with limit orders.

    The execution price of a stop order can therefore deviate significantly from the stop price since prices change rapidly. An investor can avoid the risk that a stop order is executed at an unexpected price by placing a stop-limit order, but the limit price can prevent the order from being executed. In the next article, we will go into all types of stop orders and how to set them on Young Pro.

    It is always advisable to exercise first to identify supports and resistances, simulate these operations to better understand the market and to know how to amortize losses in case of wrong forecasts.

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