Stock Orders and Stop limit orders are the two most common ways to exit a trade. They are both designed to help you exit a trade once it turns against you. But which one works better? Let’s compare.
Stock Orders and Stop limit orders are the two most common ways to exit a trade. They are both designed to help you exit a trade once it turns against you. But which one works better? Let’s compare.
A Stop Order is an order that you can set at a given price to let you exit a trade when that price is reached. This is often used to protect profit and reduce risk.
For example say you own stock XYZ which is trading at $47. You set a stop order at $45 and that allows you to exit the trade if that stop order is reached. So as soon as the order is reached you will automatically sell the stock.
The disadvantage to this is if the market is moving very fast. If the markets are moving fast the stock could hit your $45 stop order, but fill you at $43. The stop limit order was designed to stop that from happening by combining it with a limit order.
If you placed a stop limit order on the same stock for a $45 stop and a $45 limit it would look differently. In this case the stop would trigger if the stock hits $45. However rather than filling automatically it simply triggers the limit order for $45.
Now the order will only get filled if you can sell it at $45 or higher. That way you do not get filled far below the original stop price you wanted.
Even thought this does seem to solve the problem it neglects the whole purpose for setting up a stop in the first place. When you place a stop it should be the most you are willing to lose on a trade. It should be the amount that you give up on the stock and look for profits elsewhere.
If you have a stop limit at $45 and the market is moving fast you will not get filled. That means the stock could crash to $38 and you would not have gotten out of the trade because you didn’t want to get filled if the stock went under $45.
Stop limit orders attempt to save you a few cents but can end up costing you a few dollars. Because of this I prefer to lose strait stop orders when placing a trade.
For more information about stop orders visit http://www.stocks-simplified.com/stop_order.html
For more information about the types of stock orders visit http://www.stocks-simplified.com/stock_orders.html
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