In this article, we are going to talk about Stop Loss vs Stop Limit order, we also explained which order is better to use.
Traders and investors implement Stop Loss and Stop Limit orders to restrict their losses while also protecting their winnings. When a futures contract reaches a specified price level, a Stop Loss transaction is triggered. The final trading price is unrestricted.
When the contract price reaches a specific level, Stop Limit orders are also triggered. When they do, a market limit order at a certain minimum price is activated. In this post, we’ll discuss the differences between Stop Loss and Stop Limit orders, as well as why and how you might utilize them to enhance your trading skills.
Stop Loss vs Stop Limit Order
Before knowing which one to use, let’s know what is Stop Loss and Stop Limit orders.
What is Stop loss and when can traders use them?
Stop Loss orders are used to restrict your losses if the price of a stock you own declines. When the price of a stock reaches your Stop price, a Market order is issued to the place where it will be executed. Even if the price of the stock in issue increases beyond your Stop Loss after your Stop Loss is achieved and a market order is initiated, the market order will be executed.
Similarly, if you’re shorting a stock, you may use a Stop Loss order to restrict your losses if the price increases. The Stop price is the point at which you’ll begin buying back your short position.
In most cases, the last price is used as a trigger. But where there is no last price, the bid and ask prices might be used instead. For particular product categories, the Stop Loss will not be issued when market maker quotations are not in the market or not available, in order to avoid poor executions at unfavorable prices. You can see what goods this could apply on the Products & Markets page.
Traders are highly advised to use Stop Loss orders every time they begin a trade. It reduces risk and averts a potentially severe loss. In summary, Stop Loss orders aim to reduce the risk of trading by restricting the amount of cash risked on a single deal.
What are Stop Limit Orders and why traders use them?
A Stop Limit order is a Stop Loss order that creates a Limit order instead of a Market order when the Stop loss’ price is achieved. If you’re selling anything, your Stop Limit should be lower than your Stop Loss. A sell order will not be executed if the trading price of the product drops below your Stop Limit.
This form of order ensures that the purchase or sell transaction will not be completed at a lower price than the limit you specify. When traders aren’t actively monitoring the market, they employ stop-limit orders to assist trigger a buy or sell order whenever the security hits a certain level. The order is activated once the price has been reached.
Advantages of Stop Loss and Stop Limit orders
Traders might use Stop Loss orders to open fresh positions at price levels they feel signal the start of a new trend in the very same direction. Stop Loss orders ensure that the deal is executed as long as the Stop price is met. And there is enough time before the market closes.
If the deal executes, Stop Limit orders guarantee a minimum trade price for sells and a maximum trade price for buys. If the price of a security goes against an investor’s position, both Stop orders and Stop Limit orders will help to minimize losses.
Disadvantages of Stop Loss and Stop Limit orders
Due to short-term price volatility, Stop orders might cause investors to be shaken out from positions they wished to keep. Traders are infamous in various markets for attempting to remove recognized Stop levels.
Even if a security’s price moves through the Stop price that an investor established for the protection; Stop Limit orders may not be executed at all. Stop orders may be filled at a price that is less advantageous than the Stop price stated.
Which order is better: Stop Loss or Stop Limit?
Stop Limit and Stop Loss orders each have their own set of advantages and disadvantages. And the choice ultimately comes down to the individual investor. Stop Loss orders, which enable traders to cut their losses and carry their gains, are popular among short-term traders. Stop Limit orders may appeal to those who take a longer-term perspective on their investments. As the “fair value” of the index, based on fundamentals, is likely to win out in the end.
Depending on the conditions, Stop Loss and Stop Limit orders might be useful tactics for investors to consider. They provide concrete benefits, such as more control over the risks they incur. However, as previously said, each technique has its own set of drawbacks.
As a result, investors should conduct their own analysis to decide whether certain trading tactics are suitable for them.