Stop Limit Order

By Alton Hill

Definition of a Stop Limit Order
A stop limit order sends an instruction to execute a stop order within a given price range.
Once the stop is triggered, your broker will then attempt to fill your order up to by not exceeding the limit price.

Stop Limit Order for Entries
Trader 1 - sets a sell short stop limit with a $40 Stop and 39.90 limit.
This means that once $40 is hit, an order is sent to attempt to sell the stock short between $40 and 39.90.
Trader 1 was able to sell short the stock at $39.93.

Trader 2 - sets a sell short stop market order at $40.
This means that once $40 is hit, an order is sent to sell short the stock at market.
Unfortunately the bid/ask spread opens up by 15 cents once the stock crosses $40 and Trader's 2 order is executed at market with a fill price of $39.72.
The stock then quickly bounces back up to $39.95 and Trader 2 is instantly sitting in a losing position.

Now, I know this is not always the norm, but I'm trying to make a point.
Clearly Trader 1 has far more control over the price he/she is attempting to fill on their trade.
Trader 2 is leaving their fill price up to the best market price and in really volatile market, this could prove to be a painful experience.

Stop Limit Order for Exits
While stop limits can be used for exiting trades, it is not recommended, because if your limit price is not hit, you may not be able to get out of your position.

If you insist on using stop limit trades for exiting positions, you should make the spread between the stop and limit price large enough that it will increase the odds of your order being filled.
Do not have a sell stop limit order for a stock with a stop of $200 and limit $200.01.
This stop limit order can and most likely will be jumped and if you are in a losing trade, your loss could potentially run away from you.

See You at the Top,

Alton Hill

Alton Hill is the co-founder of http://www.mysmp.com/ (My Stock Market Power) which provides free trading articles to investors. Please visit http://www.mysmp.com/trading-articles.html for more free articles.

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