A stop-limit order is an order to place a regular buy or sell order (also known as a "limit order") when the highest bid or lowest ask reaches a specified price, known as the "stop." This can be helpful for protecting gains or minimizing losses.
Once the stop price is reached, the stop is "triggered" and a resulting limit order is placed. This limit order functions as usual and attempts to fill at the limit price or better (i.e. higher or lower than the specified price, depending on whether order is a sell or buy respectively).
The stop-limit box has three inputs:
Stop - think of this as the "trigger price." If you place a stop-limit order to sell, it will turn into a regular limit order when the highest bid drops to or below the stop. If you place a stop-limit order to buy, it will turn into a regular limit order when the lowest ask raises to or exceeds the stop.
Limit - this is the same thing as the "Price" on a regular buy or sell order. Once your stop-limit order has been triggered by the highest bid or lowest ask reaching your stop price, it turns into a buy or sell order for the price you enter in the limit field.
Amount - this is the same as the "Amount" on a regular buy or sell order. It indicates the amount of coins you wish to buy or sell should your stop-limit order be triggered.
For example, if you would like the system to automatically sell your ABC once it reaches a certain price, place a stop-limit order with these parameters:
Stop: 0.024 BTC (threshold before order is activated)
Limit: 0.023 BTC (selling price)
Amount: 100 ABC
When you click Sell, a confirmation box will come up telling you what will happen: "If the highest bid drops to or below 0.024 BTC, an order to sell 100 ABC at a price of 0.023 BTC will be placed."
You now have some protection. You're holding your ABC, but if its price goes down, your ABC will automatically be sold as long as there are enough buy orders at or above 0.023 BTC. However, if there are no coins available at the limit price or better, the limit order may not execute. As with a regular sell order, your coins will be sold at the best possible price; so, if you want more confidence that your coins will be sold, you may set the limit price even lower.
Your limit price does not have to be lower than your stop. If you expect an increase in price to 0.025 BTC after a fall to 0.024 BTC, you can set your stop at 0.024 BTC and your limit at 0.025 BTC. This will cause a sell order at 0.025 BTC to be placed should the highest bid drop to 0.024 BTC. Asset ABC would then only be sold if it bounces back up to 0.025 BTC after the stop is triggered; otherwise the limit order would go unfilled.
Conversely, if you would like to purchase XYZ at a certain price and not above that price while leaving room for the price to go down, you can place a stop-limit order with these parameters:
Stop: 0.0022 BTC (threshold before order is activated)
Limit: 0.0025 BTC (buying price)
Amount: 100 XYZ
Please note that the limit function of the stop-limit order will be the maximum price you are willing to buy an asset at. Being over the current lowest ask price will mean the order will execute at the lowest ask, not the specified limit, but never execute above the limit set.
When you click the Buy button, a confirmation box will come up telling you what will happen: "If the lowest ask rises to or above 0.0022 BTC, an order to buy 100 XYZ at a price of 0.0025 BTC will be placed."
If the price of XYZ rises, you'll automatically buy in when the lowest ask reaches 0.0022 BTC (as long as there are enough sell orders at or below 0.0025 BTC to cover your purchase).
As with the sell-type stop-limit order, you can place your limit anywhere you want. If this is all too much to remember, just try entering some numbers in the stop-limit box and clicking "Buy" or "Sell." The confirmation box will come up and tell you exactly what will happen, and the order won't actually be placed unless you approve it.