Limit orders are orders to buy or sell a specific asset at a predetermined price. Traders can specify the limit price at which they want their order to be filled. When a limit order is placed, it remains active until the asset reaches the specified price or better, or the order is cancelled.
Limit orders can be useful for traders who want to buy or sell an asset at a specific price, rather than at the current market price. This can help traders to control the price at which they enter or exit a position, and to avoid the risks associated with sudden price movements.
Also, limit orders serve as a maximum slippage tolerance, protecting traders from unfavourable prices caused by sudden market movements.
Lastly, there is no guarantee that a limit order will be executed, as the asset may not reach the specified price or gap above or below the specified trigger price.
For more on this, read our order types guide.
Let’s now take a look specifically at stop loss and take profit orders.
Order Type: Stop Loss
To minimise the risk of losses, traders can use various risk management strategies, such as diversifying their portfolio and setting up stop loss orders.
Stop loss orders are a type of order that is used to close the position of a specific asset if its mark price reaches a specified trigger price.
Stop loss orders can be useful for traders who want to limit their potential losses while still allowing their investments to participate in the market's potential gains.
For example, if a trader buys SOL-PERP at $25, he can set a stop loss order at $22 i.e. when the price falls to or below $22, the corresponding SOL-PERP position will be sold. The trader can limit his potential losses to $3 per SOL-PERP, even if the price continues to decline. In this context, the stop loss order remains in effect until it is filled or cancelled.
Stop Loss On Drift
On Drift, you can choose between two types of stop loss orders: stop limit and stop market.
Both stop limit and stop market orders are triggered based on your stop price. However, the stop limit order, after triggered, will create a limit order, while the stop market order will create a market order.
Let’s take “stop limit” as an example: We’ll buy SOL-PERP at $22, so we key in $22 at “Limit Price”. To protect our downside, we key in $20 at “Trigger price”. We complete our order by keying in the order size and confirming our trade.
In case SOL-PERP rises in price, we benefit and can choose what to do next. Should SOL-PERP go down to $20 or below, our position will be closed and sold as a limit order.
Order Type: Take Profit
“Take profit” is a term used in investing and trading that refers to an order that executes when a financial asset reaches a specified price.
The price level is set by the trader, and it is usually higher than the current market price of a financial asset. Basically, the purpose of a take profit order is to lock in profits on an investment.
For example, if a trader buys SOL-PERP at $25, he can set a take profit order at $28 i.e. when the price rises to or above $28, the corresponding SOL-PERP position will be closed and sold. The trader earns $3 per SOL-PERP, even if the price continues to rise. As such, the take profit order remains in effect until it is filled or cancelled.
Take Profit On Drift
On Drift, you can choose between two types of take profit orders: take profit and take profit limit.
Both take profit and take profit limit orders are triggered based on your stop price. However, the take profit order, after triggered, will create a market order, while the take profit limit order will create a limit order.
Let’s take “take profit limit” as an example: We’ll buy SOL-PERP at $22, so we key in $22 at “Limit Price”. To lock in profit on the upside, we key in $25 at “Trigger price”. We complete the order by keying in the order size and confirming our trade.
In case SOL-PERP declines in price, we’d need to decide what to do next. Should SOL-PERP increase in price and reach $25 or beyond, our position will be sold as a limit order and we’d lock in $3 per SOL-PERP.
If you’d like to learn more on how Drift’s limit orders work, take a look at these articles:
- Drift v1 to v2: What’s Changed? Drift v1 to v2: What’s Changed?
- Drift v2’s Hybrid Liquidity Mechanism
- Just-in-Time (JIT) Liquidity Mechanism
Limit Orders: Risks
It's important to note that limit orders are not foolproof, and they do not guarantee that a trader will be able to sell at the specified price. In fast-moving markets, it's possible for a financial asset to gap above or below the specified trigger price, causing the order either not to be filled or be filled at a different price — which might be risky. Traders should always consider their own risk tolerance and investment goals when deciding whether to use limit orders.
Start Trading On Drift
If you’d like to get started with Drift, check out our guide on How To Sign Up & Log In To Drift Using Email.
In case you’re new to Solana, these guides are for you:
- How To Set Up A Wallet To Trade On Drift
- How To Deposit & Withdraw Funds On Drift
- How To Transfer Funds From A CEX Onto Drift
- How To Bridge Assets To Trade On Drift
For more, head over to our Learn hub.