A stop order is a trading functionality that allows for a fixed price point at which the position will close out should the price direction of the instrument turn against the trade. It is also commonly referred to as a stop loss order as its primary role is to limit potential losses in accordance with a trading strategy and capital available.

Most traders will have a maximum downside they are willing to expose their trading capital to in pursuit of the forecast potential upside. A general rule of thumb for traders is for their maximum exposure to a single trade to be up to 2% of their overall capital, though this could be more or less depending upon their personal strategy. A call on the maximum exposure the trader is willing to risk might also change from trade to trade.

To be precise, a stop loss order is an order that you set to sell an asset when it reaches a certain price. It is designed to limit a potential loss on a position that you have taken.

If a more volatile currency is being traded the potential upside probability will be higher than that of a less volatile currency. It also means that price fluctuations will also be more extreme, so a stop loss will normally be set further away from the opening price. It isn’t triggered by a relatively standard fluctuation before the expected price direction gets underway.

Stop orders can be adjusted during a trade. If the price moves up in accordance with the expectations behind a long position, a trader will often move the stop loss higher. This will usually be done to lock in profits that have already been achieved by price movement after a position was opened.

2 Types of Stop Orders

Additionally, to place a Stop-Limit order, you enter two prices: A Stop Price and a Limit Price. If the market reaches or goes through the Stop Price, your order becomes a Limit Order.

When to Use a Stop Order?

Stop orders are used in almost every trade and are set at the maximum exposure level the trader wants to take as part of their wider strategy and the analysis of the particular trade set-up. When a trade is opened, if the maximum exposure, including any leverage, that the trader wants to take on is 1% of trading capital, the stop loss would be set accordingly. However, the trader’s analysis may suggest that a price movement in the wrong direction of less than 1% of their capital would mean the probability of that direction continuing is high. In this case it would make sense to place the stop order at that level.

As well as being used to limit losses a stop order can be used to lock in profits. Once a certain level of profit has been realised by a trade, a new stop loss can be set a little below the current price level. This means if the price direction subsequently turns the profits won’t be lost past the stop order level. Traders can sometimes adjust the stop order on a trade several times in accordance with current conditions.

Using Stop Orders in Cryptocurrencies Trading

The volatility of cryptocurrencies and their regular price surges and steep drops means that stop losses can be invaluable, particularly if trading with leverage. However, this volatility also means stop losses generally need to be placed further away. This of course, increases the exposure of trading capital to a trade. However, if a stop loss is placed too conservatively, there is a significant risk a relatively normal fluctuation before the forecast price movement begins will close out the trade and lock in a loss at the stop order’s level.