A stop order is a sort of insurance from a disadvantageous price trend.
A stop order is needed in cases when you are waiting for the best price to buy or sell an asset, but want to play it safe in case if the price goes in the opposite direction.
|
Buy stop order |
Sell stop order |
|
|
Goal |
buy cheap | sell high |
|
Expectations |
price drop | price rise |
|
Risk |
price rise | price drop |
|
Stop price |
higher than the market price | lower than the market price |
A common example of a situation where a stop order can be used (buy stop order):
Bitcoin price is slowly plunging, so a trader decides to wait a little longer for a cheaper position. Suddenly, a certain country legalizes cryptocurrencies pushing the price to rise. The price all of a sudden surged faster than it was falling, thereafter the trader does not have enough time to reach and profit from the trade.
A buy stop order allows you to protect yourself from this kind of situation. A trader sets a restriction: he sets a price of bitcoin (higher than the original, that is, the current market price), although he does not like it (not very profitable), it allows him to spend not much more than the amount planned for the purchase he needs. Moreover, a stop order will automatically buy Bitcoin when the price rises, without waiting for additional instructions from the trader.