What is a Stop-Limit Order?

A stop-limit order is a conditional trade over a set timeframe that combines the features of stop with those of a limit order and is used to mitigate risk. It is related to other order types, including limit orders (an order to either buy or sell a specified number of shares at a given price, or better) and stop-on-quote orders (an order to either buy or sell a security after its price has surpassed a specified point).

This type of order is an available option with nearly every online broker.

The stop-limit order will be executed at a specified price, or better, after a given stop price has been reached. Once the stop price is reached, the stop-limit order becomes a limit order to buy or sell at the limit price or better.

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How Do Limit Orders Work?

Key Takeaways

  • Stop-limit orders are a conditional trade that combine the features of a stop loss with those of a limit order to mitigate risk.
  • Stop-limit orders enable traders to have precise control over when the order should be filled, but it's not guaranteed to be executed.

How Stop-Limit Orders Work

A stop-limit order requires the setting of two price points.

  1. Stop: The start of the specified target price for the trade.
  2. Limit: The outside of the price target for the trade.

A timeframe must also be set, during which the stop-limit order is considered executable.

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

The downside, as with all limit orders, is that the trade is not guaranteed to be executed if the stock/commodity does not reach the stop price during the specified time period.

Features of Stop and Limit Orders

A stop order is an order that becomes executable once a set price has been reached and is then filled at the current market price. A traditional stop order will be filled in its entirety, regardless of any changes in the current market price as the trades are completed.

A limit order is one that is set at a certain price. It is only executable at times the trade can be performed at the limit price or at a price that is considered more favorable than the limit price. If trading activity causes the price to become unfavorable in regards to the limit price, the activity related to the order will be ceased.

By combining the two orders, the investor has much greater precision in executing the trade.

A stop order is filled at the market price after the stop price has been hit, regardless of whether the price changes to an unfavorable position. This can lead to trades being completed at less than desirable prices should the market adjust quickly. By combining it with the features of a limit order, trading is halted once the pricing becomes unfavorable, based on the investor’s limit. Thus, in a stop-limit order, after the stop price is triggered, the limit order takes effect to ensure that the order is not completed unless the price is at or better than the limit price the investor has specified.

Real World Example of a Stop-Limit Order

For example, assume that Apple Inc. (AAPL) is trading at $170.00 and an investor wants to buy the stock once it begins to show some serious upward momentum. The investor has put in a stop-limit order to buy with the stop price at $180.00 and the limit price at $185.00. If the price of AAPL moves above the $180.00 stop price, the order is activated and turns into a limit order. As long as the order can be filled under $185.00, which is the limit price, the trade will be filled. If the stock gaps above $185.00, the order will not be filled.

Buy stop-limit orders are placed above the market price at the time of the order, while sell stop-limit orders are placed below the market price.