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Order types: stop, stop-limit, trailing-stop

Summary:

I have a small story for you.
One guy, Daniel, Identified a falling wedge pattern. He didn't understand the word “probabilities”, and though this bullish setup could never break downside.
So, he bought a “big big sum” of Bitcoins, to prepare for the next “big big bull run”.
He went to sleep, dreaming of the big big bucks he's gonna make.
When he woke up, open his chart, this is what he sees:

Big losses on Bitcoin

Hahah, this moonboy should have used a stop loss!

Making fun of losses

The stop order

A stop order, is not held in the order book. It is held by the exchange itself, which will execute a market order when market's price touch your stop level. It will buy/sell at the best available price in the order book.
However, on sharp, sudden, precipitated moves, the order can be realised at a price differing notable of your stop level. But don't worry, it's very rare that they deviates more of than 2%.

A stop order is not necessarily a stop-loss.
If you don't have any position taken:

This kind of placement is particularly useful to trade breakout and chart patterns.

If you do have a position:

It can also be used to:

No matter what kind of position you enter, you should always have a stop-loss in place, or you may end like Daniel and people will laugh at you.
Setting a take-profit is advised for scalpers, day traders, and swing traders. Position traders, who have all the time of the world, should focus on identifying the top and closing manually, rather than using a fixed limit, to optimize their gains.

Placing the stop

It should not get triggered uselessly. As you know, the price can have hiccups sometimes, or not respect exactly the support and resistance.
This is why I recommend placing your stops at a certain % away from your entry, and not too close.
Alternatively to the % method, you can choose to place it below/above the previous existing support/resistance level.

Example of a trade involving a SL and a TP:

Example of a trade setup involving a stop-losses and a take-profits

Here is the result of the trade:

Result of the previous trade setup

Example of a stop as a short entry with EOS/BTC:

Example of a short position opened with a stop on EOS/BTC

We placed the stop low enough to eradicate most of the possibilities of a reversal, then the price fall from $4 to $1.55: a big move of -60%, ended by a double-bottom.

Example using a stop as an entry in a bullish setting represented by a falling wedge:

Using a stop order to enter the market on a breakout

Adjusting the stop-loss

When a trade being to make you significant profits, but you decide to let your gains run, remember to adjust your SL.
This way, if the trend reverses against you, and hit you stop, it will be closed with profits, and no losses.

If you follow the market with trend-lines, you could choose to move the SL closer to the trend-line as the trend is moving forward.

The stop-limit order

A standard stop order will execute a market order when triggered. For large orders, markets with low liquidity, or rapidly moving order book, the price at which the market order fills can differ notably from the stop level.

A stop-limit will execute a limit order and could result in a more favourable entry/exit.

Example

Setting a stop-limit orderWe are selecting “Exchange Sell”

Here, when Bitcoin drop to 7200, the limit order will be put in the order book, at the price of $7100.
Most of the order will surely match instantly with buyers. But it is an insurance that we will not sell below $7100.

The trailing-stop order

A trailing stop, is a stop trailing the ticker price by a set distance.
It is used to let your profit run and close when the price reverse against you.

Example

Setting a trailing-stop orderWe are selecting “Exchange Sell”

Here, the stop will be triggered at a price of $8027.3
If the price rise to $8500, the stop will be triggered at $8400
If the price rise to $8600, the stop will be triggered at $8500, etc...

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