Stop-limit orders combine the features of stop orders and limit orders to give you more control over your trade execution. They are more complex than basic order types, but they can be very useful in certain situations. In this guide, we will explain how stop-limit orders work and when to use them.
What is a Stop-Limit Order?
A stop-limit order is a two-part order that triggers a limit order once a specific stop price is reached. You set two prices: the stop price (which activates the order) and the limit price (the worst price at which you are willing to execute).
The simple version: A stop-limit order says "Once the stock hits my stop price, place a limit order at my limit price." It gives you price protection, but there is no guarantee your order will fill.
How Stop-Limit Orders Work
Here is the step-by-step process:
- You set a stop price and a limit price
- The order remains dormant until the stock reaches the stop price
- Once the stop price is reached, a limit order is placed at your limit price
- The limit order will only execute at the limit price or better
- If the market moves past your limit price, your order may not fill
Stop Price vs Limit Price
Understanding the difference between these two prices is critical:
- Stop price: The trigger price that activates your limit order
- Limit price: The worst price at which you are willing to buy or sell
For sell stop-limit orders, the limit price is typically set below the stop price to increase the chance of execution. For buy stop-limit orders, the limit price is typically set above the stop price.
Sell Stop-Limit Order Example
Example: Protecting a Long Position
You own 100 shares of Microsoft at $400. You want to protect against losses but avoid selling too cheap in a flash crash.
- Current price: $400
- Stop price: $380 (triggers the order)
- Limit price: $375 (worst price you will accept)
Scenario A: Microsoft drops gradually to $380. The stop triggers and your limit order is placed at $375. The stock is at $378, so your order fills at $378.
Scenario B: Microsoft gaps down overnight to $360 on bad news. The stop triggers but the stock is already below your $375 limit. Your order does not fill and you are still holding shares now worth $360.
Buy Stop-Limit Order Example
Example: Breakout Entry
Tesla is trading at $240 with resistance at $250. You want to buy on a breakout but not pay more than $255.
- Current price: $240
- Stop price: $251 (triggers the order when resistance breaks)
- Limit price: $255 (maximum price you will pay)
Scenario A: Tesla breaks out and reaches $251. Your limit order is placed at $255. The stock is trading at $252, so you buy at $252.
Scenario B: Tesla gaps up on news to $260. The stop triggers but the price is above your $255 limit. Your order does not fill and you miss the trade.
When to Use Stop-Limit Orders
Stop-limit orders work best in these situations:
- When price control matters: You want protection but refuse to sell at any price
- Volatile stocks: Prevent selling at extreme prices during flash crashes
- Overnight holds: Protect against gap downs while avoiding panic selling
- Less liquid stocks: Prevent getting a terrible fill in thin markets
- Breakout entries: Enter on breakouts without overpaying
Advantages of Stop-Limit Orders
- Price control: You will never execute worse than your limit price
- Flash crash protection: Avoid selling at ridiculously low prices
- Precision: More control than regular stop orders
- Two-level protection: Combines trigger and price protection
Disadvantages and Risks
Stop-limit orders have significant drawbacks:
- No execution guarantee: If the price moves past your limit, your order will not fill
- Gap risk: In fast markets, you might end up holding a losing position
- Complexity: Two prices to set means more decisions and potential confusion
- False security: You might think you are protected when you are not
Critical warning: If a stock gaps down significantly, a stop-limit order might not protect you at all. The order will trigger but not execute, leaving you holding shares that continue to fall.
Stop-Limit vs Regular Stop Order
Here is how they compare:
- Regular stop order: Guarantees execution once triggered, but price may slip significantly
- Stop-limit order: Guarantees your price, but may not execute at all
Choose regular stop orders when getting out of a position is more important than the exact price. Choose stop-limit orders when you have a specific price threshold below which you would rather hold than sell.
Setting the Gap Between Stop and Limit Prices
The gap between your stop price and limit price depends on several factors:
- Stock volatility: More volatile stocks need a wider gap
- Liquidity: Less liquid stocks need more room
- Time of day: Opening minutes are more volatile
- Market conditions: Uncertain markets warrant wider gaps
A common approach is to set the limit price 1-3% below the stop price for sell orders.
Tips for Using Stop-Limit Orders
- Understand the tradeoff: You might not get out of a bad position
- Monitor during volatility: Check if your orders have triggered but not filled
- Set realistic limits: A limit too close to your stop may not fill
- Have a backup plan: Know what you will do if the order does not execute
- Consider stock liquidity: More liquid stocks can have tighter gaps
Master Your Order Types
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Summary
Stop-limit orders give you more control over your execution price than regular stop orders. They are useful when you want to limit losses but refuse to sell at any price. However, they come with the significant risk of not executing at all in fast-moving markets. Use them when price control is more important than guaranteed execution, and always have a backup plan in case your order does not fill.
Want automatic price adjustment? Learn about trailing stop orders or review the basics with our stop order guide.