A stop order is a type of order to buy/sell an asset when its price reaches a particular point. When that price is hit, the stop order is converted into either a market order or a limit order (stop market vs stop limit).

Stop orders are used as an automated way for a trader to ensure they get in or get out of a trade when they want. 

It differs from a limit order in that a limit order is the maximum you're willing to pay to buy, or the minimum you're willing to take to sell. If the price in a limit buy is higher than current, it will fill immediately at the best price under your limit price. For a stop order, it won't fill until the price hits the stop price.

Use cases of stop orders

Here are some use cases of stop orders:

  • When you buy an asset thinking the price will go up, but you want to reduce losses in case your hypothesis is wrong and the price goes down. You can use a stop order to limit your losses. This type of stop order is called a "stop loss" and is considered smart practice. You can also keep increasing the stop loss as the trade goes in your favour, so that you can "lock in" profits by protecting them in case the trend reverses.
  • When you buy an asset thinking the price will go up, but it will only go up to a certain point before reversing. You can set a stop order at the price you think it will reach before reversing. This type of stop order is called a "take profit" as you're setting a predetermined level to get out of the trade and take a profit.
  • When you want to get into a trade, but only if it reaches a certain level first because you see that as confirmation that it will keep trending in that direction. For example, BTC is $9900. You think if it hits $10,300 that the trend will keep going and there will be a bull rush even higher to the moon. So you set a stop order for $10,300. The order will only fill once $10,300 gets hit. If the price never reaches, say it hits $10,200 before crashing down, then your stop order will never be filled and you won't lose any money.

Stop orders are one of the best tools a trader has to protect his assets and to help automate his trades. Automating your trades with stop orders lets you walk away from the exchange and rest assured that you won't lose your shirt. And you'll be the most rational before a trade, and the least rational during a trade, so it's better to set your stop orders at the start, rather than relying on making the right decision in the heat of the moment.

Some exchanges even let you set a stop loss and a take profit at the same moment you do the limit order to enter the trade. That way it saves you from having to enter several different orders at once.

Stop market vs stop limit

A stop order can either be a stop market order or a stop limit order. For a stop market, when the stop price is hit, the order turns into a market order and will fill at whatever price it can get. For a stop limit, when the stop price is hit, the order turns into a limit order and will only fill if it can at least get the limit price.

For example, if you enter a long position on BTC at $9000, and put a stop market order at a $8500 stop price to prevent losing too much money (a stop loss). If the price plummets through $8500 really fast, the market order might fill at a price much lower than $8500. Or if the price taps $8500 and goes up again, the market order might fill at a price higher than $8500. It's whatever it can get at the moment.

For a long stop limit order you set both the stop price and the limit price upfront. So if you set $8500 as the stop price, you might decide to put a limit price at $8250 (the limit price has to be lower than the stop price for sell orders), because you think if it plummets all the way down past $8250, it will likely rebound to that level because it'll be oversold. Essentially you're saying, "I want to exit the trade if it hits $8500, but I'm not willing to get anything less than $8250 if that happens." If the price drops below $8250 and never returns, your sell order will never fill and you'll be left with an even greater loss.

For stop losses, it's generally advisable to stop market orders because they're guaranteed to fill.