limit order

What is a stop-limit order?

A stop-limit order is a conditional trade within a set time frame that combines the features of a stop-loss and a limit order to reduce risk. It is related to other order types, including limit orders (orders to buy or sell a specified number of stocks at a given price or better) and quote stop orders (orders to buy or sell a security after the trade is complete) ) price has exceeded the specified point).

key takeaways

  • A stop-limit order is a conditional trade that combines the features of a stop-loss and limit order to reduce risk.
  • Stop-limit orders give traders precise control over when an order should be executed, but there is no guarantee of execution.
  • Traders often use stop-limit orders to lock in profits or limit downside losses.

How do limit orders work?

How stop-limit orders work

A stop-limit order requires two price points to be set:

  1. Stop Loss: The beginning of the trade at the specified target price.
  2. Limit: The outside of the traded price target.

A time frame must also be set during which stop-limit orders are considered executable.

The main benefit of a stop-limit order is that the trader has precise control over when the order should be executed.

As with all limit orders, the downside is that if the stock/commodity does not reach the stop price within the specified time period, there is no guarantee that the trade will execute.

A stop-limit order will be executed at the specified price or better after the given stop price is reached. Once the stop price is reached, a stop-limit order becomes a limit order to buy or sell at the limit price or better. This type of order is an option available to almost every online broker.

Features of Stop and Limit Orders

A stop-loss order is an order that can be executed after a set price is reached and then filled at the current market price. Traditional stop-loss orders will all execute regardless of the current market price at the time the trade is completed.

A limit order is an order placed at a specific price. It is only executable if the trade can be executed at the limit price or at a price deemed more favorable than the limit price. If trading activity causes the price to move against the limit price, the activity associated with the order will cease.

By combining these two orders, investors have greater precision when executing trades.

A stop-loss order is filled at the market price after hitting the stop-loss price, regardless of whether the price turns unfavorable. If the market corrects quickly, this can result in a transaction being completed at a lower-than-ideal price. Combining the functionality of a stop-loss order with a limit order ensures that once pricing becomes unfavorable, the order will not be executed against the investor’s limit price. Therefore, in a stop-limit order, after the stop price is triggered, the limit order takes effect to ensure that the order will not be filled unless the price is equal to or better than the limit price specified by the investor.

A real example of a stop-limit order

For example, let’s say Apple Inc. (AAPL) is trading at $155 and investors want to buy the stock when it starts to show some serious upward momentum. The investor places a stop-limit order with a stop price of $160 and a limit price of $165. If the price of AAPL is above the stop price of $160, the order is activated and becomes a limit order. As long as the order can be filled below $165 (the limit price), the trade will be filled. If the inventory gap is above $165, the order will not be filled.

A buy limit order is placed above the market price when the order is placed, and a sell limit order is placed below the market price.

What is the difference between a stop order and a limit order?

A stop-loss order ensures execution, while a stop-limit order ensures a fill at the desired price. The decision about which type of order to use depends on many factors.

Once the stop loss level is breached, the stop loss order will be triggered at the market price. Investors who hold long positions in securities whose prices are falling rapidly may find that stop-loss orders are executed at prices well below the level at which the stop-loss was placed. This can be a significant risk when buying a long position when a stock is short (for example, after an earnings release); conversely, an upward gap can be a risk for a short position.

A stop-limit order combines the features of a stop-loss order and a limit order. Investors specify a limit price, thus ensuring that stop-limit orders will only be filled at the limit price or better. However, as with any limit order, the risk here is that the order may not be executed at all, leaving the investor in the red.

Are stop-limit orders valid after hours?

Stop-loss orders will only be triggered during standard market hours, usually 9:30AM to 4PM ET. They are not executed during extended hours or when markets are closed on weekends and holidays.

What is an example of a stop-limit order for a short position?

A short position requires a buy stop limit order to limit losses. For example, if a trader holds a $50 short position in stock ABC and wants to limit their losses to between 20% and 25%, they can enter a stop-limit order to buy at $60 and a limit at $62.50 enter. If the stock trades between $60 and $62.50, a stop-limit order will be executed, limiting the trader’s short position losses to the desired 20%–25% range. However, if the stock gaps (say to $65), the stop-limit order will not be executed and the short position will remain open.

How long do stop-limit orders last?

Stop-limit orders can be set as intraday orders (in which case they will expire at the end of the current market session) or good-to-cancel (GTC) orders that will carry over into future sessions. Different trading platforms and brokers have different expiry times for GTC orders, so please check the time period for which your GTC order is valid.

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