Stop-Limit Order

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).

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.
  • Traders often use stop-limit orders to lock in profits or to limit downside losses.

How Do Limit Orders Work?

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.

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

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. Combining the stop order with the features of a limit order ensures that the order will not get filled 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 $155.00 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 $160.00 and the limit price at $165.00. If the price of AAPL moves above the $160.00 stop price, the order is activated and turns into a limit order. As long as the order can be filled under $165.00, which is the limit price, the trade will be filled. If the stock gaps above $165.00, 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.

What is the difference between a stop-loss order and a stop-limit order?

A stop-loss order assures execution, while a stop-limit order ensures a fill at the desired price. The decision regarding which type of order to use depends on a number of factors.

A stop-loss order will get triggered at the market price once the stop-loss level has been breached. An investor with a long position in a security whose price is plunging swiftly may find that the price at which the stop-loss order got filled is well below the level at which the stop-loss was set. This can be a major risk when a stock gaps down, say after an earnings report, for a long position; conversely, a gap up can be a risk for a short position.

A stop-limit order combines the features of a stop-loss order and a limit order. The investor specifies the limit price, thus ensuring that the stop-limit order will only be filled at the limit price or better. However, as with any limit order, the risk here is that the order may not get filled at all, leaving the investor stuck with a money-losing position.

Do stop-limit orders work after hours?

Stop-loss orders will only be triggered during standard market hours, which is generally 9:30 am to 4:00 pm EST. They will not get executed during extended-hours sessions or when the market is closed for weekends and holidays.

What is an example of a stop-limit order used for a short position?

A short position would necessitate a buy-stop limit order to cap losses. For example, if a trader has a short position in stock ABC at $50 and would like to cap loses at between 20% and 25%, he can enter a stop-limit order to buy at a price of $60 and a limit price of $62.50. If the stock trades at a price between $60 and $62.50, the stop-limit order will be executed, capping the trader's loss on the short position in the desired 20% to 25% range. However, if the stock gaps up, say to $65, the stop-limit order will not be executed and the short position will remain open.

How long do stop-limit orders last?

Stop-limit orders can either be set as day orders - in which case they would expire at the end of the current market session - or as Good-Till-Canceled (GTC) orders, which carry over to future trading sessions. Different trading platforms and brokerages have varying expiries for GTC orders, so check the time period for which your GTC order will be valid.