Stop Limits, how useful are they?

Stop limit orders allow you to put two different orders into your position, a stop and a limit.  It allow you to get in or out at a good price.

When you set a stop limit order you tell your broker that you want to buy a stock between two prices and if you can’t get it between those two prices not to buy it.

So are they useful?  Well let’s look at the pros and cons.

First the pros

1.       It allows you to get into a stock at an exact price.

Because of this you will know exactly what your risk to reward would be on the trade.

2.       You will not get in after a gap.

Sometimes, if you are right and place the order to buy you will get filled at a much higher price than you would have like. For example you want to buy the stock at $45 but if you place the order after hours and it gaps up and opens at $50 the next day, that $50 price may not give you the best reward for the best price.  So a stop limit order can help prevent you at getting at a price too high.

There are also some cons.

1.       It can work against you as a stop.

If you use a stop limit order to limit your losses you are going to be in a big surprise.  If the stock gaps down you can lose a ton of money, if the stock falls below your limit order.  When exiting a stock it is normally a good idea to either use a stop order or a market order.

2.       You might miss getting in

This order type is the most strict order type.  You might miss getting into a good position just because the stock gabs above the price you would have liked to get in.

So are stop limits useful?  That depends on the trader; they may or may not be useful to you and your trading approach.

For more on stop limits visit http://www.stocks-simplified.com/stop_limit_order.html