Stop Limit Order Trading for Beginners
New traders may have heard about fast-executing orders. Stop limit orders combine limits and stops. Read about stop limit orders and when to use them in trading.
Stop-limit order—what?
A trader places a stop limit order to buy or sell an asset at a “stop” price or better. These orders have stop-and-limit pricing.
Stop price triggers limit order. Limit orders activate when market price exceeds stop price. Buy or sell the security at the limit.
Stop limit orders prevent losses and enter or exit positions at a specified price.
How Do Stop Limit Orders Work?
Example of stop-limit orders:
Situation: You bought $50 XYZ Company shares to avoid large losses. Set a $45 stop and $44.50 maximum. Your order becomes a limit order at $44.50 or higher if the price declines below $45.
The stock price drops below $45 triggers your stop limit order to sell at $44.50 or higher. Market factors and buyer availability may hinder your acquisition.
You prevent big losses using stop limit orders. Selling shares for $44.50 or more is guaranteed.
Stop-limit orders when?
Use stop limit orders in risky trading or to safeguard wins or losses. A typical trader uses this order:
Stop limit orders protect profits by selling an asset when its price goes below a threshold. Eliminates emotional trading in turbulent markets.
Stop limit orders may help breakout traders initiate positions at price thresholds. They may trade soon after the breakout.
Sell or purchase assets using stop limit orders at support or resistance levels. Price reversals may help traders.
Stop limit orders help traders but aren’t failsafe. Market circumstances, liquidity, and trade gaps might hinder order execution. Set stop-and-limit prices and consider trading risks.
Conclusion
Stop-limit commands combine stop and limit. Traders control execution price and get loss protection. Beginner traders might benefit from knowing when to utilize stop limit orders.
References and sources:
1. Investopedia – “Stop-Limit Order” – https://www.investopedia.com/terms/s/stop-limitorder.asp
2. TD Ameritrade Education – “Stop limit orders” – https://www.tdameritrade.com/education/investing-basics/market-basics/stop-limit-orders.page
3. Charles Schwab – “Using Stop Orders to Limit Losses” – https://www.schwab.com/resource-center/insights/content/using-stop-orders-to-limit-losses
4. Fidelity – “Stop-Limit Order” – https://www.fidelity.com/learning-center/trading-investing/trading/stop-limit-order/overview