A Brief Insight Into Stop Limit Orders

Article Written By: RebbecaMyers

Stop limit orders can be defined as instructions to the system to submit a sell/buy limit order when the set trigger price that is specified by the user is hit. They are usually executed at the specified prices if the set discontinuation price is achieved. They are used to mitigate the risks that come with stop orders in cases where the execution prices cannot be assured. The order is usually transformed into one giving instructions to buy/sell at the limit price. If possible, the action can be done at a better price.

They usually work by combining the stopping and limiting types. The former are those that become executable when a specified price is reached, which is then filled at the prevailing market price. On the other hand, limit types are those that are at certain prices (or better). An investor is able to gain more trade execution accuracy when he/she combines these two types.

Stop orders are normally filled at the market price once the end price is hit. Their limit counterparts are never filled if the price of the security does not reach the limit price that is specified. These order types are therefore very effective since they combine the advantages of both order types.

They have the benefit of allowing the trader to have accurate organization on the time of filling an order. However, as with limit orders, the trade cannot be absolutely guaranteed to be executed should the commodity/stock fail to reach the break price.

They can be very effective and powerful if correctly used. This does not, however, mean that one should blindly jump to using them. For instance, they cannot be used when one wants to get into a stock. If a stock meets your selection criteria and it fits the description of a good buy, then you may not use them. You can simply place the order instead of waiting for the best price which may be just a mirage. They are also a great tool for selling short or trading options contracts.

You can also not use them when you want to limit your losses. Contrary to popular belief, they may not mitigate your losses. In such a case, it would be more appropriate to use a normal stop order that will get you out when your discontinuation is reached. It would not also be appropriate to use them when you buy stocks that are meant for short term trade only.

However, it would be a good idea to use these mechanisms in the case where certain shares hit a resistance point but you expect them to break through nevertheless. The stop order is triggered when the shares overcome the resistance. Using them, one is able to balance their trading risks and gains.

They may also be used to manage stocks that bounce off support. If one is trying to catch stock that is bouncing off support, it would be a good idea to wait for it to begin bouncing first. If the stock were to gap up too high, you would have a target that you would not want to fill in such a scenario.

About the Author

More investing information can be found on stop limit orders at the finance site. Other helpful investment tips like understanding how selling short can make you profits in down markets .

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