Stop loss vs stop limit: which order to use in crypto?

The short version

Both orders wait below the current price and act when the price falls to a level you choose, called the stop price. The difference is what happens next:

• A stop-loss (also called a stop-market order) becomes a market order. It sells at the best price available right away, so it almost always fills, but the price can be worse than your stop.
• A stop-limit becomes a limit order at a second price you set, the limit. It never sells below the limit, but if the price falls through it before the order fills, nothing sells.

A stop-loss puts getting out first. A stop-limit puts the price first.

How a stop-loss order works

You own ETH bought at $3,000 and set a stop-loss at $2,820, 6% below.

1. The price falls to $2,820. The stop triggers.
2. A market sell order goes to the exchange.
3. It fills at the best bids available. In a calm market that is about $2,818. In a fast fall it might be $2,790.

You are out of the position either way. The cost of certainty is that the fill price is not certain.

How a stop-limit order works

Same position, but you set a stop-limit with a stop at $2,820 and a limit at $2,800.

1. The price falls to $2,820. The stop triggers.
2. A limit sell order at $2,800 goes to the exchange.
3. If buyers are there at $2,800 or above, it fills. If the price drops from $2,815 to $2,760 in one move, the order sits unfilled at $2,800 while the price keeps falling.

You never sell below $2,800. The cost of that certainty is that you may not sell at all.

Side by side

• What it becomes when triggered: a stop-loss becomes a market order; a stop-limit becomes a limit order.
• Will it fill? A stop-loss almost always fills. A stop-limit may not.
• At what price? A stop-loss fills at the next available price, possibly below the stop. A stop-limit fills at your limit or better, or not at all.
• Main risk: with a stop-loss, slippage in a fast fall. With a stop-limit, being left in a falling position.
• Best for: a stop-loss suits protecting a position. A stop-limit suits selling only at an acceptable price.

Which to use, and when

Use a stop-loss when getting out matters most. That is the usual case for protecting a position. Crypto can fall sharply in minutes, and a stop that does not fill offers no protection at all.

Use a stop-limit when price matters more than certainty. For example, on a coin with a thin order book where a market order could fill far below the last price, or when you would rather keep the position than sell below a level.

If you use a stop-limit, leave room between the two prices. A limit only a hair below the stop is easily skipped in a fast move. A gap a little wider than the coin's usual slippage gives the order a chance to fill.

A worked example in a fast fall

BTC trades at $86,000. Two traders hold BTC bought at $90,000, one with a stop-loss at $84,600 and one with a stop-limit at $84,600 with a $84,400 limit. Bad news hits and BTC drops from $84,900 to $83,200 within a minute, then keeps sliding to $81,000 over the next hour.

• The stop-loss triggers at $84,600 and fills at about $84,100. The trader loses about 6.6% on the position and is out.
• The stop-limit triggers at $84,600, but the price is already below $84,400 by the time the limit order arrives. It does not fill. An hour later the position is down 10%.

Neither outcome is good, but one is bounded. This is an illustrative example, not a real result.

Trailing stops

A trailing stop follows the price up. With a 5% trailing stop, if you buy at $3,000 and ETH rises to $3,400, the stop moves to $3,230. If ETH then falls, the stop stays at $3,230 and sells there. It protects part of a rise without capping it. Trailing stops can be market or limit based, with the same trade-off as above.

Common mistakes

• Setting the stop too close. A stop inside the coin's normal daily swing triggers on noise.
• Setting the limit equal to the stop. The stop-limit then fills only if the price pauses exactly there.
• Moving the stop further away once the trade is losing. That turns a planned loss into an open one.

How a TradeCorgi agent handles it

An agent's stop-loss is a rule, not an order resting on the exchange. The agent checks the price at most once a minute, and when the stop level is reached it sells at market, so it exits rather than waiting for a price that may not come.

Around that, the agent has a daily loss limit: if several stops hit on the same bad day, the agent pauses once the day's losses reach your cap. The decision log records both the stop level and the price the order actually filled at, so you can see any slippage.

A checklist for choosing

• Is getting out more important than the exact price? Use a stop-loss.
• Is the coin thinly traded, with large gaps between buy and sell prices? Consider a stop-limit with a generous gap.
• Have you tested the stop level in a backtest that includes slippage?
• Is there a daily loss limit behind the stop, in case several trades go wrong at once?