Stop-Limit Order

Stop-Limit Order Definition

Stop-limit order is a combination of a stop order and a limit order. Traders often use stop-limit orders to protect profits or limit downside losses.

  • Stop Price: This is the price at which the stop-limit order is triggered and converted into a limit order.
  • Limit Price: This is the price or better at which the order will be executed. (refer Limit Order page)

In simple terms, the stop price triggers the order to become active, and the limit price sets the price range where the order will be executed.

Advantages of Stop-Limit Order

  1. Risk Management: It’s useful for setting specific exit points or limiting potential losses.

Disadvantages of Stop-Limit Order

  1. Order Might Not Be Filled: If the stop price is triggered, and the market price moves too quickly past your limit price, your order may not be filled.
  2. Complexity: Stop-limit order can be tricky for new traders, especially when determining appropriate stop and limit prices.

Example of Stop-Limit Order

Let’s say current market price is trading at $50. You want to cut loss if the price falls to $45 but don’t want to sell below $43.

  • Stop Price: $45 (Once market price hits $45, the order is activated and turns into a limit order).
  • Limit Price: $43 (The order will only execute at $43 or better).

In this case, if market price drops to $43, your order becomes a sell limit order, and it will only be executed if the price is $43 or higher. If price falls below $43, your order won’t be executed.

Quiz on Stop-Limit Order

  1. What happens when a stop price is triggered in a stop-limit order?
  • A) The order becomes a market order.
  • B) The order becomes a limit order.
  • C) The order is cancelled.

2. What does the limit price in a stop-limit order do?

A) It activates the stop order.
B) It sets the price at which the order can be executed once triggered.
C) It determines the market price of the instrument.

3. Which of the following is a disadvantage of a stop-limit order?

  • A) The order may never be filled if the market moves too quickly.
  • B) It guarantees the order will be filled at the desired price.
  • C) It’s easier to execute than a market order.

4. If the sell stop price is set to $50 and the sell limit price is set to $45, what happens if the price falls below $50 but doesn’t reach $45?

  • A) The order will be executed at the best available price.
  • B) The order will not be executed.
  • C) The order will be cancelled immediately.

5. Which of the following statements is true regarding stop-limit orders?

  • A) They always guarantee a filled order.
  • B) They combine a stop order and a limit order.
  • C) They are only used for buying stocks.

6. What does the stop price in a stop-limit order do?

A) It sets the price at which the order will be executed.
B) It triggers the order to become active.
C) It cancels the order if the price moves against you.

Answers

  1. B) The order becomes a limit order.
  2. B) It sets the price at which the order can be executed once triggered.
  3. A) The order may never be filled if the market moves too quickly.
  4. B) The order will not be executed.
  5. B) They combine a stop order and a limit order.
  6. B) It triggers the order to become active.