A Stop Limit Order Protects

A stop limit order is used as a protective sell when you cannot watch the markets or have found that when the time comes you cannot pull the trigger and get out of a losing position.

Stop Limit Order vs Stop Order

With a stop limit order you place a sell stop, which has a specific trigger price and then you add a limit order to that. By doing this the stop trigger price identifies when the stop should be initiated and the limit order identifies your lower limit which tells the broker you will not sell below this level.

In the chart below, I have shown a stop limit order example. In this case, ATS.TO was purchased as it made a higher high on September 17, 2024. The low on September 16 is chosen as the exit point. A bit more room is desired so the stop trigger point is set to $34.49. The stop limit is put at $34.40.

The above stop limit order example tells your broker that you want to exit the stock once price trades at $34.49 or lower and you will accept any price down to $34.40.

Stop Market Orders - Speed at a price

With a stop loss order in place at $34.40, when the stock gaps down to say $34.00 your stock will be sold at around $34.00. If this bothers you then place a stop limit order which means that you will add a limit to your stop loss. So while your stop loss order (sometimes refereed to a stop market order) will say sell at $$34.00, your stop loss limit order will say to sell at $34.49 and I will not sell below $34.40. By adding the limit you are telling your broker that you will only sell the stock if you can get at least $34.40.

As with most things in trading, there is a positive side and negative side to most of your actions. In this case, a stop market order is guaranteed to sell your stock and get you out of the market once a trade at or below your stop price has occurred. You will be really happy you have a stop market order in when price gaps below your stop and keeps dropping.

You won't be so happy when price opens below and then rises.

A Watch Out

Generally though, since the first loss is the best loss, it is likely better to just enter a stop market order and live with the odd time a really large gap comes along and prices continue to drop. Ultimately you will run into a situation where the stock blows through your stop limit order and keeps going down. So while you could have gotten out at say $34.00, provided you are around, you might get out at $33.

This is one of the largest concerns with placing limits on your stop orders. You may find, that at some point, you will lose far more because you placed a stop limit vs a stop market order.

Stop limit orders can also help you with stocks that trade low volume or have a large spread between the bid and asked. For most high volume stocks, the spread between the bid and asked is pennies so once your stop is hit you will be out at your stop price or perhaps a few cents below.

However, when you are in a stock with a low volume the spread may be in the 2 to 5 cent range. Thus, with a stop market order you can expect to sell at the bid while with a stop limit order you may get a slightly higher price. 

You have to remember that when you place these types of orders in the market they will not always work out as planned. Stops, no matter where you place them, will cause you grief. Too tight and you sell prematurely. Too loose and you will lose too much money when the stock goes against you.

Unsure about limit and market orders then find out a bit more here to help you understand a limit order.

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