What is a stop-limit order?
Stop-limit orders are condition trade. It combines stop-loss features with limit order with the primary objective of mitigating risk. A stop-limit order is generally related to other order types and enables traders to precisely control when an order should be filled but not guaranteed execution.
How Stop-Limit Orders Work
A stop-limit order requires setting two price points as mentioned below –
- Stop – This is the start of the specified target price for the trade.
- Limit – This is the outside of the price target for the trade.
A time frame is also set during which this order is considered executable. One of the main benefits is that the trader has precise control over when the order should be filled. As with a limit order, the downside is that the trade execution is not guaranteed if the stock does not reach the specified stop price during the specified period. In the case of stop-limit, the order is executed at a specified price or even better price after reaching a given stop price. Once the stop price is breached, the stop-limit order becomes a limit order to buy or sell at the limit price or better.
Features of Stop and Limit Orders
A stop order is executed when the set price is reached and then filled at the current market price. A traditional stop order is filled in its entirety regardless of changes in the current market price as the trades are completed. A limit order is set at a specific price and is only executable when the trade is performed at the limit price or a price more favourable than the limit price. If the price becomes unfavourable, then the activity related to the order will cease. Thus, combining the two orders gives the investor more precision in executing the trade. A stop order is executed at the market price after the stop price has been reached, even if the price changes to an unfavourable position. This will lead to trades being finalised at less than desirable prices if the market adjusts quickly. Combining the stop order with a limit order ensures that the order will not get filled once the pricing becomes unfavourable, based on an investor’s limit. Thus, in such a order, after the stop price is hit, the limit order takes effect, ensuring that the order is not completed unless the price is at or better than the limit price that the investor has specified.
Example
For example, let us assume a stock of Reliance is trading at Rs 2355, and an investor wants to buy once it begins to show some upward momentum. The investor puts in a stop-limit order to buy with the stop price at Rs 2360 and the limit price at Rs 2365. If the stock price moves above the Rs 2360 stop price, the order is activated and turns into a limit order. The trade will be filled as long as the order can be filled under Rs 2366, which is the limit price. The order will not be executed if the stock is above Rs 2366. Buy stop-limit orders are traded above the market price, while sell stop-limit orders are placed below the market price.
Do stop-limit orders work after hours?
Stop-loss orders are triggered during standard market hours. They will not be executed when the market is closed.
Example of a stop-limit order for a short position
A short position necessitates a buy-stop limit order to minimise losses. If any trader has a short position in stock Dixon Technologies at Rs 5000 and wants to cap losses at 10 to 15%, they can enter a stop-limit order to buy at a 5500 and a limit price of Rs 5750. The stop-limit order will be executed if the stock trades between Rs 5500 and Rs 5750, minimising the trader’s loss on the short position in the desired range. However, if the stock gaps up—say, to Rs 5800—the stop-limit order will not get executed, and the position will remain open.
How long do stop-limit orders last?
They can be set as either day orders—in which case they would expire at the end of the current market session. It can also be a Good till Cancelled order which can be carried over to future trading sessions.
Conclusion
Stop limit order combines a stop order and a limit order. It provides more control to the trader and allows them to control the execution of the transaction in a favourable price range. These orders are placed for day trade or can be placed for a more extended period using the good till cancelled option. As mentioned previously, when a trader is looking to buy or short-sell security, the stop-limit order can seem very fruitful as the trader will be doubly sure of the execution and the trend leading to execution. As far as the stock order execution is concerned, it is generally possible when the stop price is reached and within the favourable limits provided.
FAQs
What is a stop order example?
Let’s say you bought 100 shares of ABC at Rs. 500 a piece. You want to protect your profits and limit your losses, so you decide to place a stop limit order.
First, you set a stop price of Rs. 550. Your order will be triggered if the stock price falls to Rs. 550.
Next, you set a limit price of Rs. 545. Your order will be executed only if the stock price drops to Rs. 550 or below and then rises to Rs. 545 or higher. If the stock price drops below Rs. 545 after your order is triggered, your order will not be executed.
So, you place a stop limit order to sell 100 shares of ABC at a stop price of Rs. 550 and a limit price of Rs. 545.
If the stock price rises, you can continue to hold onto your shares and enjoy the profits. If the stock price falls to Rs. 550, your order will be triggered, and if it rises back up to Rs. 545 or higher, your shares will be sold, limiting your losses. This helps you avoid a scenario where you end up selling your shares at a lower price than you wanted to.
Why are stop orders used?
Stop orders are commonly used in trading to help traders manage risk and protect their positions. A stop order is a specification to buy or sell a security once it reaches a specified price level.
What is a stop order meaning?
A stop order is a type of order that is placed by an investor to buy or sell a security at a specified price, known as the stop price. Once the market price of the security reaches the stop price, the stop order is triggered, and the order is executed at the next available price.
How do I set a stop order?
Here’s how you can set a stop order:
- Log in to your trading account with your broker.
- Select the stock you wish to buy or sell.
- Choose the “Stop Order” option from the order type dropdown menu.
- Enter the stop price at which you want the trade to be executed.
- Set the quantity of shares you want to trade.
- Click on the “Place Order” button to submit your order.
