A stop limit order combines two order types into one. It gives you the triggering mechanism of a stop order plus the price control of a limit order. This hybrid approach offers more precision but comes with trade-offs. Let us break down exactly how it works.
What is a Stop Limit Order?
A stop limit order requires two prices: a stop price and a limit price. When the stock reaches your stop price, it triggers a limit order (not a market order) at your specified limit price or better.
The key difference: A regular stop loss becomes a market order when triggered and sells at any price. A stop limit becomes a limit order and will only sell at your limit price or better. You control the price but risk not getting filled.
How Stop Limit Orders Work
Here is the two-step process:
- Step 1: The stock price reaches your stop price, which activates your order
- Step 2: A limit order is placed at your limit price
The order only fills if the stock trades at your limit price or better after being triggered.
Stop Limit Sell Order Example
You own shares of Amazon (AMZN) at $180. You want to protect your position but not sell too cheap.
- You set a stop limit order: Stop at $170, Limit at $168
- AMZN drops and hits $170, triggering your order
- A limit order to sell at $168 or better is placed
- If AMZN trades between $170 and $168, you sell
- If AMZN gaps below $168, your order does not fill
Stop Price vs Limit Price
Stop Price
The stop price is the trigger. When the stock reaches this price, your order activates. It is like an alarm that wakes up your limit order.
Limit Price
The limit price is the worst price you will accept. For a sell stop limit, it is the minimum you will sell for. For a buy stop limit, it is the maximum you will pay.
Setting the Gap
Most traders set their limit price slightly worse than their stop price to increase fill probability. If stop and limit are the same, there is less room for the order to fill during volatility.
Stop Limit Buy Orders
Stop limit orders also work for buying. Traders use them to enter positions when a stock breaks above resistance.
Stop Limit Buy Order Example
A stock is consolidating at $95. Resistance is at $100. You want to buy if it breaks out but not chase it too high.
- You set a buy stop limit: Stop at $100, Limit at $102
- The stock breaks out and hits $100, triggering your order
- A limit order to buy at $102 or better is placed
- If the stock stays between $100 and $102, you get filled
- If it gaps straight to $105, you do not chase it
Advantages of Stop Limit Orders
1. Price Control
You know the worst price you will receive. In fast-moving markets, regular stop losses can fill at terrible prices. Stop limits prevent this.
2. Protection Against Gaps
If a stock gaps through your stop, a regular stop loss sells at the gap-down price. A stop limit will not fill at all, letting you reassess.
3. Works for Breakout Entries
Buy stop limits let you enter breakouts automatically without paying any price the market demands.
4. More Precision
When you need exact price control for your strategy, stop limits deliver more precision than market orders.
Disadvantages of Stop Limit Orders
1. No Guarantee of Execution
This is the biggest risk. If the stock gaps through your limit, you remain in the position. Your intended protection does not work.
Gap Risk Example
You own a stock at $50 with a stop limit: Stop at $45, Limit at $44.
- After hours, the company reports terrible earnings
- The stock opens at $35 the next day
- Your stop triggered at $45, creating a limit order at $44
- But the stock never traded at $44, it went straight to $35
- Your order never filled. You still own shares worth $35
2. Complexity
Setting two prices instead of one adds complexity. You need to understand both components and set them appropriately.
3. Can Leave You Stuck
If your stop limit does not fill during a crash, you may end up holding through even bigger losses than intended.
Stop Limit vs Stop Loss
| Feature | Stop Loss | Stop Limit |
|---|---|---|
| Order type when triggered | Market order | Limit order |
| Execution guaranteed | Yes (during market hours) | No |
| Price guaranteed | No | Yes (if filled) |
| Gap protection | Sells at gap price | May not fill |
| Best for | Guaranteed exits | Price-sensitive exits |
When to Use Stop Limit Orders
- Illiquid stocks: Prevent selling at unreasonably low prices
- Breakout entries: Buy momentum without chasing too high
- When price matters more than exit: You would rather stay in than sell cheap
- Volatile stocks: Avoid slippage in fast-moving names
- When you can monitor: Ready to take action if limit does not fill
When to Use Stop Loss Instead
- You must exit: Absolute need to close position
- Liquid stocks: Tight spreads make slippage minimal
- Cannot monitor: Need guaranteed protection while away
- High-risk events: Earnings, FDA decisions, etc.
Tips for Using Stop Limit Orders
- Set reasonable limit prices: Leave room between stop and limit for fills
- Monitor unfilled orders: If your stop triggers but limit does not fill, take action
- Consider the stock's volatility: More volatile stocks need wider limits
- Avoid overnight for protection: Gaps can make stop limits useless
- Test with small positions: Learn how they work before using large size
Track Every Order Type
Pro Trader Dashboard logs all your orders and shows execution prices. See how your stop limits perform over time.
Summary
Stop limit orders give you price control that regular stop losses lack. They combine a stop trigger with a limit execution, preventing bad fills during volatility. However, they come with the risk of not filling at all if the stock gaps through your limit. Use them when price matters more than guaranteed execution, and always monitor unfilled orders.
Learn more about order types with our guide on stop loss orders for guaranteed exits, or explore trailing stops for locking in profits automatically.