Stop limit orders give investors greater control by establishing a maximum or minimum price for each order. So what exactly is stop limit order and why would you use a stop limit order? If you do not know yet, let’s read the article below.
What is a stop limit order?
A stop limit order is a tool used by traders to mitigate the risk of a trade by specifying the highest or lowest price they are willing to accept for a stock. Traders start by setting a stop price (an order to buy or sell a stock once the price reaches a certain point) and a limit price (an order to buy or sell a specific amount of the stock when the price reaches a certain point).
When the stock price reaches the set stop price, a limit order is triggered, instructing the market maker to buy or sell the stock at the limit price. It helps limit losses by identifying the point at which investors are unwilling to take losses.
Why would you use a stop-limit order?
Stop limit orders give traders precise control over when the order should be executed, but there is no guarantee that they will be executed. Traders often use stop limit orders to lock in profits or limit downside losses.
For example, suppose Apple Inc. (AAPL) is trading at $155 and an investor wants to buy the stock when it starts to show strong upward momentum. The investor places a stop limit order with a stop price of $160 and a limit price of $165. If the price of AAPL moves above the stop price of $160, the order is activated and becomes a limit order. As long as the order can be filled below the limit price of $165, the trade will be filled. If the stock gaps more than $165, the order will not be executed.
A buy stop limit order is placed above the market price at the time of the order, while a sell stop limit order is placed below the market price.
I hope this article will help you to learn what exactly is stop limit order and why would you use a stop limit order. Traders use stop limit orders when they are not actively monitoring the market, which help trigger buy or sell orders when a security reaches a specified point. Once the price is reached, the order is automatically triggered.
