It is designed to shield you from financial loss if the market shifts too far against you. These can be buying or selling orders, but no trade happens until the targeted price is reached.
The stop-market order turns into a market order when the price is reached.
It is also known as a stop-market order, stop order, stop-loss market order, and stop-loss order.
Maintaining an appropriate risk/reward ratio, or limiting losses and increasing returns, is the key to successful trading.
Stop-market orders make orders automatic. By doing this, crypto traders can avoid constantly monitoring the market in an effort to limit your losses.
A buy-stop order will be placed above the current market level to purchase a stock before it becomes too expensive, while a sell-stop order will be placed below the current market level to prevent too much loss on a sale.
Stop-market orders are the underlying order type for stop-loss market orders. The order will become live and execute as a market order once the market price reaches the specified stop-order price.
The purpose of a stop-market order, commonly known as a stop order is to reduce losses in a trade.
When the stop price is reached, stop-market orders are converted to market orders, which execute at the current market price.
These orders will always allow you to exit a losing trade, but you should be prepared for bigger losses than you anticipate.
The stop-limit order is a more complicated and riskier stop-loss order type that, if the market price rises, can restrict crypto trader’s losses.
How Stop-Market order works
Consider a user purchasing ETH token for $100 with a stop-market order to sell ETH at $99. There is news in public on the crypto sector and now all crypto buyers pull out on the market. No one wants to buy ETH in the $100 range, except one, which is offering $99 per ETH, wants to buy ETH token, except one at $98, where someone still has an order to buy at that price.
Your stop-loss market order will look for anyone ready to buy ETH at or below $99 once the price falls below that level. Your stop-loss market order will fill there since that is where the closest buyer is at $98 per ETH. In this instance, you expected to lose just $1 per ETH, but really lost $2 per ETH token.
This is called slippage. It’s a common issue with any type of market order.
Even though slippage can lead to more losses, the market order nonetheless shields you from additional possible losses. Slippage doesn’t always happen.
Stop-loss orders that use limit orders as their underlying order type that are known as stop-loss limit orders. The stop price and the limit price are typically used in stop-limit orders.
The limit order does not become active until the order hits the stop price, at which point it does.
Limit orders are only executed at the order price (or at a better price if one is available). Limit orders are not always filled because the market could move in the opposite direction. As a result, the stop-loss limit order might not be able to help you exit a losing transaction.
A stop-loss limit order can go unfilled forever in a market that is trading swiftly (or in a market with a wide bid-ask spread), exposing you to steadily increasing losses. But occasionally, you might be able to save some cash.