Stop Loss Order vs Stop Limit Order: A Comprehensive Guide

Stop loss orders are designed to limit potential losses by automatically selling a security when it falls below a certain price, typically set at a percentage below the market price.

A stop loss order is triggered when the security reaches or falls below the specified price, at which point it will be sold at the best available price.

This can help prevent significant losses, but it may not always result in the best possible sale price.

For example, if a stock is trading at $50 and a stop loss order is set at $45, the stock will be sold as soon as it falls to $45, regardless of the current market price.

In contrast, stop limit orders are designed to limit losses while also allowing for a specific sale price, which can help maximize profits.

A stop limit order combines a stop price with a limit price, meaning the security will only be sold if it reaches the stop price and the sale can be executed at the limit price or better.

This can help investors avoid selling at a low price, but it requires a more precise understanding of market conditions and price movements.

A stop is a type of order that helps you manage risk in the stock market.

It acts as an insurance policy that minimizes your loss exponentially by automatically converting into an actual sale when the share price dips below a certain level.

For instance, if you've created a sell stop-loss order for $10 on ABC shares, it will automatically convert into an actual sale as soon as the share price dips to $10 or below that.

A stop-loss order is mostly used when you're expecting volatility to occur in your stock just before its time to close trades.

It's also called a 'stop-loss market order,' and its main advantage is that it can limit your losses should there be any sudden changes in the market.

You can also think of a stop-loss order as something that protects you from 'unnecessary' risks at times.

It helps traders exit a particular investment at the time when its price goes below their risk appetite.

Stop-loss orders are a way to protect your investments from tough market conditions, especially during volatile times.

A stop-limit order is different from a stop-loss order in that it closes trades when they get to your preselected prices without cutting off significant profits.

It's more of a "take profit" option than limiting losses.

A stop-loss order is a conditional instruction that's triggered when the price of a stock reaches a certain level, known as the stop price. This order then converts into a market order, which is executed as soon as a buyer or seller is available while the market is open.

You can place a stop-loss order to protect your position from sharp declines. For example, if you own a stock trading at $100 and you're worried it might drop by 10%, you could place a stop-loss at $95. This way, if the stock value falls to $90, your stop-loss will turn into a market order at $95.

The stop price of a sell order needs to be below the current market price, otherwise it would immediately trigger and become a market order. This is because the broker will sell your stock at the going price as soon as a buyer is located.

There's one important issue to consider when using a stop-loss: sometimes a stock doesn't open at the same price as the previous closing price. If trading resumes at a much lower price, your stop-loss may fall in the gap between the closing price and the price where trading resumes. This could trigger the sale at a much lower price than you anticipated.

Here are some key differences between stop-loss and stop-limit orders:

The idea of using a stop-loss is to protect your position from sharp declines, but keep in mind that it locks in your loss. If a stock has a high beta, you could trigger the sale and miss out on the rebound.

A stop-loss order is a conditional instruction that becomes a market order if the price moves past the stop price. It's like setting a price alert that triggers a sell order if the stock falls to a certain level.

A stop-loss order can be placed to sell a stock at a specific price, but it's not a guarantee that the trade will occur. If the price keeps rising, the trade never gets executed.

A stop-limit order, on the other hand, is a limit order that becomes active if the price reaches the stop price. It's like setting a price alert that triggers a sell order if the stock falls to a certain level, but only if the price is at or better than the limit price.

The stop price of a sell order needs to be below the current market price, otherwise, it would immediately trigger and become a market order.

Here's a comparison of stop-loss and stop-limit orders:

In a fast-moving market, the price of a stock could fall quickly to the limit price and fill at that price. In a slower-moving market, the order could fill at the stop price because that price is better than the limit price.

You can determine the levels at which to set your stop-loss levels using technical analysis. This can help you gauge downside risk and identify key support levels for a long position.

A stop-loss order is just an advanced direction to a broker, telling them to place a trade only if the value of a stock reaches a specified price. This can be useful for protecting your position from sharp declines.

The stop price of a sell order needs to be below the current market price, otherwise it would immediately trigger and become a market order. For example, if the current price is $100, you could place a stop-loss at $95 to protect your position from a 5% decline.

Here are some key considerations when setting stops:

Technical analysis can be very useful for determining key support levels for a long position, but beware of false breakouts. Ensure that you research stop-loss levels diligently using technical analysis and other tools before entering them into your trading platform.

Most online brokers offer a stop-loss as an option when you enter a sell ticket for a stock you own. Technical analysis can be very useful to determine the levels at which stop-losses should be set.

The premise here is that it may signal additional losses for the stock when a key support level crumbles. Figuring out key support levels for a long position can be useful for gauging downside risk.

Beware of false breakouts, however. Ensure that you research stop-loss levels diligently using technical analysis and other tools before you enter them into your trading platform.

If the current price is $100, perhaps you would place a stop-loss at $95, 5% below the current price.

Most traders agree that it's ideal to use both kinds of trading orders together as per your requirements.

Stop-loss orders are used for protecting investments from any potential losses, but stop-limits allow you to make your trades work like limit orders with an added protection against any unforeseen circumstances.

If you're looking for advice on when to use each one, experts recommend using stop-limit orders instead of stop-loss orders because they help you automatically lock in profits instead of letting them go.

In most cases, it's better to use stop-limit orders because they offer more control over your trades, but it ultimately depends on your trading strategy and goals.

Here's a simple rule of thumb to help you decide:

A stop-loss order is a conditional instruction that tells your broker to sell a stock if it falls to a certain price, known as the stop price. The stop price needs to be below the current market price to work effectively.

If you place a stop-loss order, your broker will sell the stock at the going price as soon as a buyer is located. For example, if you place a sell stop-loss at $95 while the stock is trading at $100, your broker will sell the stock at the going price once it falls to $95 or lower.

The stop price can be a percentage below the current market price, such as 5% below the current price. This is useful for protecting your position from sharp declines, as mentioned in Example 2.

A stop-loss order can be triggered even if trading is halted or stopped, resulting in a potential gap between the closing price and the price where trading resumes. This can lead to a lower price than expected, as seen in Example 1.

To use a stop-loss order, most online brokers offer this option when entering a sell ticket for a stock you own. You simply need to choose how many shares to sell and what you want the stop price to be, making sure it's below the current market price.

Here's a summary of the key points to keep in mind when using a stop-loss order: