A double stop order is an opportunity to take into account a potential rise and fall of the price in a single order. Let's consider the following example:
A trader thinks that Bitcoin is a profitable investment and is confident that the price will rise to 15,000 USDT. However, he considers the current price of 10,000 USDT to be good enough but not extremely attractive to enter the market at this point.
This trader is smart enough to know that the price can suddenly drop for a number of reasons, giving him the opportunity to buy BTC for 5,000 USDT (the potential gain, in this case, will be 5,000 USDT comparing to the current market price). On the other hand, the trader is convinced that in the case of supportive circumstances, the price is likely to rise. In case of a price surge, the trader decides that he is ready to buy bitcoin no more than for 11,000 USDT (loss of 1,000 USDT comparing to the current price). Therefore, he places a double stop order where he takes into account the following conditions:
|
|
Take profit (estimated benefit) |
Stop loss (minimized loss) |
|
Stop level (on which the order is activated) |
4,950 |
10,950 |
|
Limit price (maximum purchase price) |
5,050 |
11,050 |
Under the given conditions, the trader is guided by such prices:
|
|
Take profit (estimated benefit) |
Stop loss (minimized loss) |
|
Estimated buy price |
5,000 |
11,000 |
|
Relative to the current price |
10,000-5,000=5,000 |
10,000-11,000=-1,000 |
Why the trader would want to buy bitcoin later at 11,000 USD if he can buy it now and potentially save 1,000 USD? Because he considers that, the price may potentially fall to 5,000, and then rise. Since his final prediction is 15,000, in the end, he will profit according to below scenarios:
|
|
Buy |
Sell |
Profit |
|
Ideal option (two birds in the bush) |
5,000 |
15,000 |
10,000 |
|
Current option (a bird in the hand - 1) |
10,000 |
15,000 |
5,000 |
|
Acceptable option (a bird in the hand - 2) |
11,000 |
15,000 |
4,000 |