With the increasing interest in the financial markets and crypto money markets in Turkey and the world, the concept has entered the lives of many people. One of them is the stop limit order. So what is stop limit order, how to use stop limit in binance, is it worth using stop limit order?
What is the stop limit?
A stop limit order, as the name suggests, is a combination of two different orders: a stop order and a limit order. So what does this command do? An investor waits till the price level is determined by him.
If the share price reaches this level, the limit order is activated and a buy or sell transaction takes place at the price set by the investor. Namely, a stop limit order is a type of order that gets activated when a certain price level is reached and allows buying or selling at that level (or a better level that you specify).
Suggested Reading | What are the order types?
example of stop limit order
We answered the question what is a stop limit order. Now, let us give an example of a stop limit order on a buy transaction to better understand the issue.
For example; The current price of a share is 100 TL and you would like to buy this share when it drops to 95 TL. However, you want to buy at most from 93 TL. In this case, you set your stop price at 95 TL and your limit price at 93 TL. If the share price reaches 95 TL, your buy order will be activated, but the purchase will not take place as long as the share price is above 93 TL.
This type of order helps to protect the trader from market movements. However, stop limit orders also have their own risks. Especially in fast moving markets, a price may trade below or above your limit price.
As a result, the stop limit order provides the trader with the opportunity to trade at the price level set by him, and can be used as a tool to minimize potential losses. However, it is necessary to be careful and understand the market dynamics very well while using this order.
Let us now give an example through a sale transaction.
Stop limit orders can also be used to sell and are a strategy that traders use to limit potential losses. Let us explain this situation with an example of sales:
Suppose you have a stock in your portfolio with a price of 120 TL and you are planning to sell this stock at a certain level in case the price drops.
But you don’t want the stock to be sold at a very low price with a sudden drop. This is where the stop limit order comes into play.
That is, let’s say you want to sell if the stock price drops to 115 TL, but you don’t want to sell it below 113 TL.
In this case, you set your stop price at 115 TL and your limit price at 113 TL. When the share price reaches 115 TL, your sell order is activated, but as long as the share price is above 113 TL, the sell transaction takes place. If the share price drops below 113 TL, your sell order will not be executed.
This strategy ensures that you do not sell your stock at an unduly low price during sudden market downturns. However, like buy orders, sell orders also carry risks with stop limit orders. Especially in high volatility markets, a trade may be placed at a price other than the limit price you set.
When using such orders, it is very important to carefully monitor market movements and set your strategies accordingly. This way, you can protect your profits and limit potential losses.
What is stop limit logic?
The logic behind stop limit orders is to protect the investor from sudden and unexpected movements in the market. This type of order allows the trader to trade under the terms and limits set by him, thereby helping him to protect his profits and limit potential losses.
In short, stop limit orders allow traders to hedge against market uncertainties and automatically implement predetermined strategies.
Therefore, it is an effective tool for both beginners and experienced traders. However, when using this order type, it is essential to understand the market dynamics well and apply them carefully.
What should be the stop limit?
“What should be the stop limit?” This question varies depending on the investor’s risk tolerance, investment strategy, market conditions and the volatility of a particular asset. For example, first you have to determine how much loss is acceptable to you. If you are prepared to lose 2% of your deposit, you can set your stop limit 2% below the current price.
Therefore, there is no one definite answer to this question. However, there are general principles to consider when considering what a stop limit should be:
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