Stop orders are similar to, but distinct from, limit orders. Where limit orders are actually on the order book, stop orders are only placed when the predefined price is reached, and they can be used in conjunction with market or limit orders.
The distinction is subtle, but the key difference is that limit orders are already placed on the order book and can be seen by anyone, while stop orders aren’t even submitted until the conditions are met. They can be set up to place a market or limit order, which can give traders increased flexibility.
Basically, a stop market order says, “If the price reaches X, buy/sell immediately.” This doesn’t mean you will necessarily get the price of X, but when that price is reached, a market order is immediately placed to buy at the best current price. Alternatively, a stop-limit order says, “If the price hits X, place an order to buy/sell at Y.” Note that X and Y can be the same price, but they don’t have to be. So, you could theoretically have a trade that goes, “If Bitcoin hits $10,000, place an order to buy it, but only at the price of $10,000.” Alternatively, you could set it up as follows: “If Bitcoin hits $10,000, place an order to buy it, but only at $10,100.” By combining these layers of instruction, traders can create complex strategies and manage risk more effectively.