stoplimit

Stop-limit is a type of conditional order used in trading that combines a stop order with a limit order. It is designed to trigger a limit order only after a specified stop price is reached or passed, giving the trader control over the price they are willing to accept.

How it works

A stop-limit order has two price levels: the stop price and the limit price. When the market price reaches the stop price, the order is activated and becomes a limit order to buy or sell at the limit price or better. For a buy stop-limit, the trader wants to buy at a price up to the limit price. For a sell stop-limit, the trader wants to sell at a price at or above the limit price. Crucially, once activated, there is no guarantee the order will be filled if the market moves away from the limit price; if the price gaps past the limit, the order may not execute.

Key features

- Stop price: the trigger that activates the order.

- Limit price: the maximum (for buys) or minimum (for sells) price at which the order will be executed.

- Conditional and time-bound: can be set as day orders or good-til-cancelled (GTC) depending on the broker.

- Risk control: helps set a worst acceptable price, avoiding unfavorable fills, but may result in no execution.

Comparison and considerations

- Unlike a traditional stop order, a stop-limit order does not convert to a market order; it remains a limit order after activation.

- Unlike a plain limit order, it only becomes active when the stop price is reached.

- Best used when traders want price protection but can tolerate the possibility of not being filled in fast-moving markets.

Example

A trader holds a stock at 50 and places a stop-limit to sell with stop at 45 and limit at 44. If the price falls to 45, a limit sell order at 44 or higher is placed. If the price gaps below 44, the order may not fill.