Have you ever wondered why some traders swear by stop limit orders? Maybe you’ve thought about using them but really don’t understand how they work or the way to use them profitably in your trading. Fret no more because you are going to learn how easy it is to use a stop limit order. In this lesson you will learn what is a stop limit order in stock trading.
Stop Limit Order
A stop limit order is an order placed that combines the features of a stop order with those of a limit order. A stop limit order will be executed at a certain 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.
Stop Limit Order Sell Example
For example, let us say that you bought SPY at $175 but you want to limit your loss just in case the price drops:
You set your sell and limit prices to $172. If the price of SPY drops to $172, the stop order is triggered and the limit order is sent to the market. This is how you use a limit order defensively.
Using a stop limit order offensively involves setting different stop and limit prices. This is called a buy stop limit order.
For example, let us say that SPX (you can’t buy the index directly but this is just an example) is trading at $1759.77 and you are confident that if it hits $1760, it’s likely to rise up to $1790.
By setting a buy stop at $1760 with a limit price of $1770, you are setting an upper range for which you are willing to purchase SPX. If SPX rises to $1760 but then quickly jumps up to $1762, the price still falls within your buy range and your order is filled. If SPX does a gap up to $1780, that is above your buy stop limit order price of $1770 so you will not buy any shares of SPX. Setting the upper buy limit to $1770 stops you from chasing SPX by buying too high.
Instead of a buy stop limit order, you can also execute a buy limit order.
Buy Limit Order
A buy limit order is an order to buy a stock at or below a certain price. By using a buy limit order, the trader is guaranteed to pay that price or better for the stock.
For example, let us say Google is trading $1015.20 per share. You don’t want to pay $1015.20 for Google because you think the stock will fall back down to the upper rim of the gap up.
You can set a limit order to buy Google at $975. This tells your online broker that you are not willing to pay more than $975 a share for Google. Only if Google falls to $975 or less, will your broker buy the shares for you. If Google’s stock does not drop to $975, no shares will be purchased.
Stop Loss Vs Stop Limit Order
A stop loss order becomes a market order when a stock sells at or below the specified stop price.
A stop limit order (the examples above) becomes a limit order when a stock sells at or below the specified price. The price is sometimes called the stop limit order activation price.
A stop market order vs stop limit order (also called a stop order vs a stop limit order) is the difference of whether the order becomes a market order, or a limit order, when the stop price is hit.
You will hardly ever need to use a stop limit order. Most of the time, a stop loss order (also called a “stop order” or “stop market order”) gets the job done. The real difference between a stop loss vs stop limit order is if you only want to sell a stock within a certain range so that if it falls too low, you don’t sell all your stock. For example, stock ABC is trading at $10. You go long at $10 but if it drops between $9 and $8, you want it to sell; however, if it really drops fast and gaps down to $7 or $6, you don’t want to sell your stock because that’s too low and you’d rather buy more of the stock at such a cheap price level or just hold on to what you currently have. In this case, you would use a stop limit order. However, if you just wanted to sell all your stock of ABC if it drops to $9 or lower, you would use a stop loss order.
Stop Limit Order In Etrade Pro
Buy Limit Order
Both a buy limit order and a sell limit order are set the same way in Etrade Pro. In the “Order Entry” section, under “Price Type”, select “Limit”:
Now set the limit price at the maximum that you would be willing to pay for the stock and click the “Buy” button. Your order will be executed at or below your limit:
In this example, you are telling Etrade to not buy any shares of Google until the price falls to $975 or below.
Sell Limit Order
In the “Order Entry” section, under “Price Type”, select “Limit”:
Set the price limit at the minimum you would be willing to sell the stock for and click the “Sell” button. Your order will be executed at or above your limit:
In this example, you are telling Etrade to not sell your shares of Google until the price climbs to $1,027 or higher.
Etrade Pro calls a stop order (or stop market order) a “stop on quote order”. As a review, a stop order (or stop on quote order), will turn into a market order when the stock hits the stop price.
In the “Order Entry” section, under “Price Type”, select “Stop on Quote”:
When you place a stop on quote order, you’re placing an order that will turn into a market order when the stock reaches the stop price. For example, let’s say you own Google and it’s trading at $1,014 and you place a stop sell order at $1,009. If or when the bid price of the stock goes down to $1,009, your order will turn into a market order and fill at whatever the current price is when your turn comes up for execution. This could be at $1,009 or higher, or lower:
Stop Limit Order
ETrade Pro calls a stop limit order a “stop limit on quote order”. To review, a stop limit order (or stop limit on quote order) turns into a limit order at the stop price.
In the “Order Entry” section, under “Price Type”, select “Stop Limit on Quote”:
When you enter a stop limit on quote order, you are placing an order that will turn into a limit order when the stock reaches the stop price. For example, if you place a stop limit on quote sell order with the stop price at $1,009 and the limit price set at $1,000 then your shares would sell at $1,009 or above – but not below the stop limit price of $1,000. So if Google went to $1,009 and then fell below $1,000 before your order filled, it would remain an open limit order:
Trailing Stop Orders
Trailing stop orders are used to help you protect any gains and limit losses automatically. The order follows the stock’s movement tick by tick so you don’t have to.
With a trailing stop order, you set the stop as a distance in either points or percent from the stock’s current bid or ask price (the bid price for sell orders and the ask price for buys). This is in contrast to a regular stop on quote order, where the stop is set as a fixed price.
In the “Order Entry” section, under “Price Type”, select either “Trailing Stop $” or “Trailing Stop %”:
In the example below, if we want to sell out of Google if the stock pulls back 5%, this is how we execute the trade:
We have placed a trailing stop order with a trailing stop value of 5%. This means that we want to sell the shares of Google when the bid price falls 5% from the highest point it reaches after order placement. In other words, 5% is the maximum we want the trailing stop level to be away from the current bid price. Our initial trailing stop level, then, gets set at $962.11 – or 5% below the current bid of $1012.75 – and the trailing stop will automatically move up if the stock price rises. If Google climbs to $1020 without falling 5% at any point along the way, our trailing stop level will rise to $969, moving up in lock step with the bid price. If Google then drops below $969, our order will then be triggered and sent to the market center for execution as a market order.
Frequently Asked Questions about Stop Limit Orders
What does stop limit order mean?
A stop limit order means that an order turns into a limit order when a stop price is hit. For example, let’s examine a sell limit order. If you place a stop limit sell order at $50, and the price of the stock drops from $55 down to $50, your shares would sell at 50 or above but not below the stop limit price. If the stop moved down quickly or gapped down below 50 before your order filled, the order would remain an open limit order. Etrade Pro calls stop limit orders, stop limit on quote orders but they mean the same thing.
Bionic Turtle posted the video educational video below called Order Types (market, limit, stop, stop-limit).
What is a trailing stop limit order?
A trailing stop limit order is a stop limit order that moves or trails the price of the stock. You set $5 as your maximum loss (you can set percentages like 5% too). This $5 follows or trails the stock price as it moves up and down. For example, let’s say you bought a stock for $55 per share. You set a trailing stop of $5 and a limit order of $49. If the stock drops from $55 to $50, your order is triggered and it becomes a limit order to sell your stock above $49. If the market drops fast below $49 before your order is filled, your order will remain an open limit order.
Sharekhan SK posted the excellent video below called How to use Trailing Stop-loss.
What are limit orders on etrade?
Limit orders on etrade allow you to set the price you are willing to buy or sell a stock. You can use limit orders on any online brokerage account, not just etrade. There are two types of limit orders etrade lets you set, a buy limit order and a sell limit order.
Buy limit order: Set the limit price as the maximum price you want to pay for a stock. Your order will execute at or below your limit.
Sell limit order: Set the limit price as the minimum price at which you are willing to sell your stock. Your order will execute at or above your limit.
Questrade posted the excellent educational video below called Stop Limit Orders.
What is a limit order book?
A limit order book is a record of unexecuted limit orders maintained by the specialist. It is a queue of orders waiting to be executed. The specialist has the responsibility to guarantee that the top priority order is executed before other orders in the book, and before other orders at an equal or worse price held or submitted by other traders. A matching engine uses the book to determine which orders can be fulfilled.
Yale posted the video lecture below from ECON 252, Professor Shiller, who talks about the history of securities exchanges from ancient Rome and the evolution of exchanges and limit order books, all the way up to high frequency trading and the Flash Crash from May 6, 2010.
What is a limit order example?
An example of a limit order is an investor who wants to buy a stock that trades for $17, but doesn’t want to pay more than $15 for it. The investor can place a limit order to buy the stock at $15. By entering a limit order rather than a market order, the investor will not buy the stock unless it drops to $15 or below. This is also called a buy limit order.
An example of a sell limit order is an investor who holds a stock that trades for $20, but doesn’t want to sell it for anything less than $22. The investor can place a limit order to sell the stock at $22. By entering a limit order rather than a market order, the investor will not sell the stock unless it climbs to $22 or above.
Goldenticker posted the video below called Basic Stock Trading Lessons – “Sell Limit” Order.
What is a buy stop loss order?
A buy stop loss order is a buy order executed at the limit price or higher. For example, if an investor is short a stock at $20, and the stock has dropped to $16 and he wants to protect his profits, he can place a buy stop loss order at $17 so that if the stock’s price rises to $17 or higher, his limit order will become a market order and he will buy to cover and close out the short position.
TimsEZconcepts posted the excellent educational video below called Stock Order Types.
What is a buy stop limit order?
A buy stop limit order is an order to buy a stock when the price rises to or above your desired entry point, but sets a limit on how much you are willing to pay. A buy stop limit order is used when a stock is trading below the price you want to enter the trade on. Many traders use buy stop limit orders to play breakout moves. For example, if an investor has a stock on his watch list that trades at $10, but he only wants to buy it if a breakout above resistance happens at $12.50, he can place a buy stop order at $12.50, with a limit set at $13. This means that if the stock climbs to $12.50, you immediately purchase the stock but if it goes above $13, you stop buying because you don’t want to chase the stock and pay too much for it.
Goldenticker posted the educational video below called Basic Stock Lessons – “Buy Stop Limit” Order.
What is a trailing stop loss?
A trailing stop loss is an order that follows the price based on either a dollar amount or a percentage. Traders use this type of order so that they can let their winners run but if the stock reverses and heads down, they can get out quickly. For example, an investor bought a stock at $20 and the stock is in an uptrend that has taken it to $30. The investor can place a 10% trailing stop loss order which, in dollar terms, will be $27 ($30 x 10% = $3. $30 – $3 = $27). If the stock continues to go higher, the investor will stay in the trade. If the stock rises to $33, the 10% trailing stop loss order will automatically trail behind and adjust to $29.70 ($33 x 10% = $3.30. $33 – $3.30 = $29.70). Now if the stock suddenly drops from $33 to $29.70 on a bad earnings release, the trailing stop will become a market order to sell the stock and exit the trade.
InformedTrades posted the excellent educational video below called Trailing Stops Easily With the 50% Rule.
I hope you enjoyed this awesome stock trading lesson as much as I did writing it!