Sirwin
Sirwin

Trading 101 - Order Types: Stop-Limit Orders

By TradingBull | TradingBull_articles | 18 Jan 2021


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A stop-limit order is an order to buy or sell an asset on an exchange/broker which is triggered when the market price of the asset reaches the set stop price value. When the stop price is reached, the order is set active as a limit order. Stop order is used to protect from losses or secure profits.

Stop-limit order is similar to a stop order. The difference is that a stop-limit order triggers a limit order instead of a market order.

Pros: Buy/sell at limit price or better. Stop-limit order is not visible on the order book (able to be seen by other traders) until triggered.

Cons: Order can take time to fulfill or never be fulfilled. Stop can be triggered but limit order could not be fulfilled in cases of significant volatility.

Example:

You bought ABC at $9,500 and know the market can be volatile. You want to protect your position while being away from the screen.

1- Stop-loss (sell ABC/buy usd): To protect yourself from suffering heavy losses, you want to sell your ABC if its price is falling below $9,000 (open a sell-limit when ABC <$9,000). After the stop is hit, the order converts in a limit order to buy at $9,000 or better (lower).

2- Take-profit (sell ABC/buy usd): Your goal is to make $500 profit per ABC. You want to sell if the price goes above $10,000 (open a sell-limit when ABC >$10,000). After the stop is hit, the order converts in a limit order to sell at $10,000 or better (higher).

Illustration of stop limit orders on a price action

Using a stop-limit order usually results into paying maker fees to the broker/exchange (as often not matched immediately).

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TradingBull
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