Crypto Limit Order vs Stop Order – The Differences

What are the differences between crypto limit order and stop order? It may be that you do not have the time or energy to monitor the crypto assets continuously to know about the price movements.

However, it is important to make sure that your crypto portfolio is not adversely affected by the price changes and you take the right action at the right time.

In that case, like most of the crypto investors do, you can also place a Limit Order or a Stop Order with your broker.

These are ideally a request or instruction to the broker to execute trades only when the price of the assets hit a certain level.

Ideally, when you place a Limit Order, it will allow you to take the full advantage of the fixed target price whether you buy or sell crypto assets.

In a Buy Limit Order it signifies buying the assets at the limit price or lower, and for Sell Limit Order, it signifies selling your crypto coins at the limit price or higher.

A Stop Order is sometimes also called a Stop Loss Order since it helps to limit the losses. In this case, the limit price is called the stop price.

For buy orders, assets are bought as soon as the price goes above it and are sold when it drops below the stop price in the case of sell orders.

Now, the question is which among the two you should choose. For that, you will need to know the differences between a Limit Order and Stop Order in the first place.

If you do not, there is nothing to worry about because you will come to know about everything in detail when you go through this article in entirety and minutely.

The ‘Which is better’ section in the end will also help you to make the right choice in the end according to your trading style, needs, and preferences.

Differences Between Crypto Limit Order and Stop Order

Differences Between Crypto Limit Order and Stop Order

Your trades will produce hugely different outcomes depending on the order type you choose to place with them.

Therefore, it is important to know the differences between them. Each of these orders suits different purposes being distinct tools, whether you are buying or selling crypto.

This article focuses on the differences between two of the major types of orders that you can place with your trades namely, Limit Orders and Stop Orders.

Such knowledge will help you to choose and use one of them in the best possible way in order to reach your identified primary goal easily by filling your orders quickly either at the current market price or at a controlled price of your trade. Here you go.

Working Process

If you place a Limit Order on your trade it will be executed at the quoted price or better automatically whenever there is an opportunity.

For example, if you want to buy a crypto coin and place a Limit Order at $50, the order will be executed as soon as the price reaches that mark or lower.

However, you will need to place the Limit Order when the current market price of the asset is higher than the price you want to quote.

If you want to sell your asset, you will have to set the Limit Order at the floor price. Placing a Limit Order will not need you to monitor the price changes and will allow you to lock in profits.

A Stop Order, on the other hand, will limit your losses when you place it on your trade. Usually, trades are executed when the price of an asset gets worse than what is quoted in the Stop Order.

This price is commonly referred to as the stop price. For example, if you set a Stop Order at $50 on your trade, an asset that is trading at a higher price as of now will be sold when the price reaches that mark thereby preventing further losses, should the price continue to fall.

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In case you want to buy an asset and place a Stop Order higher than the current market price of it, it will limit the negative aspect with the ceiling put on the price you want to acquire the asset in.

Buy Limit Order and Buy Stop Orders

You can also place Limit Order or Stop Order when you buy a crypto coin and there are some key differences between them as well.

Typically, a Buy Limit Order is executed at a price that is the same as or is lower than the limit price.

On the other hand, when you place a Buy Stop Order then the trade will be completed at a price that is more than the current market price once it is triggered.

These types of orders are usually placed by a crypto investor wanting to close a short position on a trade.

Price Gaps

In the case of Stop Orders placed on a trade, a downward price gap may result in the lowering of the prices of the assets significantly and unexpectedly.

This means that the current price of the crypto asset in the market can be considerably different from the stop price, which is worse for a seller.

On the other hand, in the case of the Limit Orders, a price gap can cause a significant and an unexpected rise in the price of the crypto assets.

In these cases, a gap up may work in your favor when you place a Limit Order to sell. This will typically be a price that is much higher than the price expected by the sellers, which is good for them.

Intent

In terms of intent, a Limit Order is placed by the investors on their crypto trade with an intention to lock in the specific price they want. These orders are warranted to execute at a specified price or better, if it is at all executed.

On the other hand, the primary intention of placing the Stop Order on a crypto trade by the investors is to limit the losses that they may incur on it.

If the price of the specific crypto asset moves in a direction opposite to that stated and against the liking of the investors, it is the Stop Order or Stop Loss Order that will place a ceiling on the probable losses.

Disadvantages

One of the significant disadvantages of Limit Orders is that these involve high commission fees from the brokers. Another downside of it is that your trade may not be executed if the quoted price is not reached.

On the other hand, when you place a Stop Order on your trade and it is triggered, the asset may be sold at a price, which may be best available but can also be lower than the limit price quoted in the Stop Order.

There are two specific reasons for this happening. One, such trades are not instantaneous and trade prices can be triggered due to fluctuations in the short term.

Some Other Differences

Here are a couple of other minor differences between Stop Order and Limit Order that are also good to know for any crypto investor.

First, the Limit Orders usually use a price to assign an amount that is least acceptable for a transaction to take place.

On the other hand, in the case of a Stop Order it uses a price simply to trigger the actual order as and when the quoted price is traded.

Secondly, a Limit Order is usually visible to the market. In contrast, a Stop Order cannot be seen until the stop price is met and the order is activated.

Thirdly, it is not possible to place a plain Limit Order to buy an asset at a price that is higher than the market price because there can be better prices that may be available already.

On the other hand, you will not be able to set a Limit Order to sell an asset below the prevailing market price because, once again, there can be better prices available in the market at that point of time.

And finally, you will need to set a Stop Limit Order along with the limit price to be very specific to your broker and both these may not always be the same.

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Which is Better – Crypto Limit Order or Stop Order?

Well, the short and simple answer to this question is that both are useful in their different ways and in different situations depending on how you use them.

Also, the needs and purposes of different crypto users are different and therefore categorizing these two order types will not be a prudent move.

Moreover, since both these orders come with different features and serve different purposes of the investors, it will not be wise to say Stop Orders are much better than Limit Orders or vice versa.

Therefore, it is better to find out which of these two order types, Stop Order and Limit Order, will be suitable for you to place on your trade.

At this point, you should remember that the Stop Orders may prevent a trade from being executed at all if the current price of the crypto asset moves away from the price quoted in the order.

And, as said, earlier, market fluctuations even in the short term can trigger a Stop Order.

Therefore, it is better to choose a brokerage that follows different principles for determining when the stop price is reached.

It may include quotation prices or last sale prices.

Stop Orders may seem to you much more useful than Limit Orders because they will allow you to limit the losses and may even guarantee profits if you choose to set a price that is higher than the cost of purchasing the particular crypto asset.

Another significant advantage of placing a Stop Order on your trades is that it will allow you to have much more control over the executing price of the order.

There are also a few other points that are worth noting while you place orders on your trades, especially Limit Orders.

One significant aspect is that your order may not be executed even if the price reaches the quoted limit price because there may be other orders ahead of yours that will be fulfilled first.

Since these orders are executed on a first come first served basis, it limits the availability of assets at the desired time and price.

When you place Buy Limit Order and Sell Limit Order, it will allow you to open a trade at your desired price and not at the prevailing market price by default.

This price can be specified most precisely and is considered to be your entry point to the trade.

And, if you place a Sell Stop Order on your trade, that order will be set off if the market price of the crypto coin reaches the stop price.

Unlike the Limit Orders, the Stop Orders may include some slippage.

This is because more often than not there is a margin difference between the stop price and the ensuing market price implementation.

Ideally, there are a few specific situations when you can use a Stop Order. These are:

  • When the value of the crypto asset has increased and you do not want to lose anything should it start falling again
  • When you want to purchase a particular crypto coin when it reaches a certain price level and you believe that it will continue to rise in the future and
  • When you want to buy an asset when it reaches the stop price that is above the prevailing market price and you do not want to lose the chance to own that particular asset due to a further rise in price.

However, you should consider the price gaps and their effects on the orders that you place.

Typically, a price gap can affect your orders in different ways depending on the type of it.

In case you do not know about a price gap, it is an event that occurs when there is a sharp movement in the price of the crypto asset up or down and no trade happens in between.

A price gap may occur due to several different factors such as:

  • A news Release
  • An earnings announcement and
  • A change in the outlook of an analyst.
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Usually, the price gaps create a notable imbalance in the demand and supply of a coin.

This will cause a significant impact on the prices of the crypto assets available in the market and in execution of trades that come with either a Stop Order or a Limit Order.

However, if you choose to go with Stop Orders you should also know that these orders come in a few different varieties but all these are effectively restrictive and are based on the prices that are not available yet in the market at the time when the order is placed originally.

A Stop Order is usually activated when a future price is available. However, the broker can execute the trade in a different way based on its type.

For example, there are several brokers today who add a ‘stop on quote’ feature to the order types.

They do this in order to make it clear to the investors that their Stop Order will only be executed when it meets a valid price specified and which is prevailing in the market.

A plain Stop Order may also turn into a conventional Market Order when the stop price is reached or exceeded.

Also, a Stop Order can be placed at the entry order and it can also be set above the prevailing market price if you want to open your position when the price of the crypto asset is rising.

In this case, it will turn into a standard Market Order provided the stop price is met.

And, when you choose to use Stop Limit Orders, it will consist of two prices namely, a stop price and a limit price.

Usually, a Stop Limit Order is used by an investor when the price forecast of an asset goes wrong.

In this case, the Limit Order to buy and sell an asset will be activated when the specific stop price is met.

In such situations the Limit Price and the Stop Price of the asset can be the same.

Also, a Stop Limit Order comes with two specific types of risks namely, partial fills and no fills.

No fill may happen when the Stop Limit Order may not close a trade if you use it as a Stop Loss in order to exit a long position on your trade as the price of the asset starts to fall.

However, it is also possible for the stop price to be activated and the limit price to continue to be unavailable.

And, even in the case the limit price is available after the stop price is triggered, the whole order may not be executed.

This causes partial fills and may happen when the liquidity at that specific price is not enough.

The risks of partial fills and no fills may be avoided by a Stop Order but in that case your order may be filled at a price that is much lower than you expected because it will be turned into a Market Order.

Now that you have a better perception regarding the differences between Limit Order and Stop Order you will find it easy to buy and sell crypto assets by using them properly in your favor.

However, make sure that you also look into and consider the market conditions, assess your risk appetite, and your financial goals before you use any of the two orders.

Conclusion

The order type you place to your crypto trades will affect their executions and outcomes and therefore you should know the differences between these order types before using them to receive the result you want from your venture.