There are a lot of complex concepts in trading that are not so easy for a beginner to understand — for example, users often wonder what is a stop limit order (SLO for short) and how it works. In the article, you can find basic information on this issue, read to the end so as not to miss a word.
Table of Contents
What It Is?
To fully trade on Tabtrader.com, you should know as much information about the SLO as possible. It refers to those orders that have a trigger price, limit price and post-trigger quantity. When the last price gets to the trigger price, the order will be placed according to the pre-set price to help users keep profits or mitigate losses.
How Does It Work?
To understand in more detail how the principle of a SLO works, let’s break it down using the instance of a stop-loss order:
- The user finds a bitcoin-tether pair and buys 10 BTC tokens at a price of 3752,05 USDT, and the support level is approximately 3622,41 USDT.
- If the price starts to drop to a level lower than the support price, then the client should leave the losses as soon as possible —> it`s worth selling 10 BTC at the price of 3586,25 USDT.
- Then customer has to indicate certain points: “selling” as a direction, 3622,41 USDT as a stop price, 3586,25 USDT as a limit price, and 10 BTC as a quantity.
Additionally, explore the take-profit SLO scenario to know ways of situation development in different conditions:
- The customer finds a bitcoin-tether pair and buys 10 BTC tokens at a price of 3775.25 USDT, and the BTC price resistance level is near 3879.45 USDT.
- If the price breaks the resistance level, then it will probably continue to rise —> the client should purchase 10 BTC tokens at a price of 3926.15 USDT.
- Then customer has to indicate certain points: “buying” as a direction, 3879.45 USDT as a stop price, 3926.15 USDT as a limit price, and 10 BTC as a quantity.
As a rule, using SLO demands double authorization in most modern trading platforms. The client will see a pop-up window for re-confirmation – without double authorization, the system will not execute the order.
Advantages & Disadvantages
If we compare the advantages and disadvantages of such a technique, then the positive features include the possibility of limiting losses. In addition, such orders come with guarantees for a maximum strike price, and the customers themselves are able to open new positions at those levels that are supposed to be the beginning of a new trend.
On the other hand, there is also a significant drawback: as a rule, an SL-order may not work effectively with short-term price fluctuations. In this case, the trader simply loses the position that was to leave. Secondly, even if the price of the asset reaches the specified stop level, execution will not be 100% safeguarded. Thus, before using such a technique, it is worth carefully analyzing the situation and being aware of the possible risks.