Stop vs Stop Limit Order Types When Trading Stocks

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In today’s video, we’re going to take a look at stop versus stop limit orders. It might sound basic for some people, but it’s important to understand if you like using stops. Depending on what strategy you’re using, such as certain option trading strategies, you might decide you don’t need stops. Some risks are already built in as far as the max loss goes, so you might not need them. But either way, I’m going to show you the difference between these two orders because it’s a common question I’ve seen on Facebook and could be beneficial for many.

Stop vs. Stop Limit Orders

Stop Orders

The primary point of a stop order is to get you out when a certain price point is hit. For example, let’s say I have five shares of Apple in a simulated account, purchased at $214.92, and it’s currently at $210.27. If I want to close these shares, I could create a closing order to sell the five shares immediately. But if I can take some heat, I might set a stop order at $210.20. This means if the price hits $210.20 or below, it will trigger a market order to get me out at the best available price, even if it’s a bit lower.

Stop Limit Orders

A stop limit order combines the stop order with a limit order. You set a stop price to trigger the order and a limit price specifying the minimum price you are willing to accept. For example, you could set a stop at $210.20 and a limit at $210.05. This means if the price hits $210.20, it will only sell if the price remains above $210.05. The benefit is more control over the sale price, but the risk is that it might not execute if the price falls too quickly.

Practical Examples

  1. Stop Order:
    • If I set a stop order at $210.20, it triggers a market order when the price hits $210.20. If the market is moving fast, I might end up selling at $210.15 or even lower.
    • This order type ensures execution but not the price, which can be crucial in a fast-moving market.
  2. Stop Limit Order:
    • Setting a stop at $210.20 with a limit at $210.05 means the order will trigger at $210.20 but will only execute if it can sell at $210.05 or higher.
    • This gives more control over the sale price but carries the risk of not executing if the market price falls below $210.05.

Key Considerations

  • Market Orders: Ensure you get out of a position but might execute at a lower price than expected in fast-moving markets.
  • Limit Orders: Provide more control over the exit price but carry the risk of non-execution if the price moves too quickly.
  • Liquidity: Stop orders generally work well with liquid stocks. For less liquid stocks, a stop limit order with a wide range can offer a balance between control and execution.

Conclusion

I hope this explanation was helpful. Understanding the difference between stop and stop limit orders can help you better manage your trades and risk. If you’re interested in more videos and training, check out our website. We have great PDF worksheets, cheat sheets, free training guides, and other resources. You can also explore the trading bucket strategy for more in-depth training and worksheets.

Thanks for joining me. Maybe I’ll see you in one of my coaching groups or in a one-on-one session. Feel free to reach out, and I’ll see you next time. Take care. Bye-bye.

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