Finance

Stop-Limit Order

Stop-Limit Order

A Stop-Limit Order is of two types of order which consist of one is ‘Stop Order’ which is activated or trigger price and the Other one is ‘Limit Order ’which is helpful to execute the trade. It is used by the traders to manage the Risk.  It helps to ensure that you will get a specific price where you will be placed an order but there is a drawback that it doesn’t give a guarantee to execute the trade.

Book your CFA Demo Session Click Here

The stop price and the limit price for a stop-limit order don’t be the same price.  For example, a sell stop-limit order with a stop price of 10rs may have a limit price of 9.50rs then they become an active limit order if market prices reach 10rs, however, the order can only be executed at a price of 9.50rs or better. This order Works on the standard market hours that are 9:30am to 3:30 pm. The order can be placed through a broker then the order is sent to the order book at the exchange. The order can remain in the order book until it gets triggered or we can cancel or the order can expire.

Traders can place different types of orders for risk and reward, which is suitable with the market conditions. They are four common types of orders that are

  • Market orders
  • Limit Orders
  • Stop-Loss Orders/Stop Order
  • Stop-Limit Order

Types of Stop-Limit Order:

 Buy a Stop-Limit order: We can purchase a stock once the market is in an upward direction to hits a price

Sell a Stop-Limit order: We can sell a stock once the market moves in a downward direction drop a price

Stop Loss Limit order for Long Position: By placing a Stop-Limit order We can exit the current position when the market declines or in the reverse direction

Stop Loss Limit order for Short Position: By placing a Stop-Limit order We can exit the current position when the market rises or in the reverse direction

Examples of Stop-Limit Order:

Buy a Stop-Limit order

In the above chart we can observe that the Nifty index is in an uptrend so we can purchase one lot Nifty once the stop price hits 15100 and also set a limit price of approximately 15140 and after a slight move, we can book a profit

Sell a Stop-Limit order

In the above chart, we can observe that the Nifty index is in a downtrend after forenoon so we can sell one lot Nifty once the stop price falls15197 and also set a limit price of approximately 15140 and after a slight move we can book a profit of 15077

Book your FRM Demo Session Click Here

Risks Associated:

1.Not Executed or Not Filled the Trade Position:  Due to some market conditions, if there is no volume of the stock the stop order is triggered but the limit price is not filled or executed in the trade position. We can take Idea stock an example the stock price is 10rs, we can place 100sharesof Stop-limit order the stop price is 11rs and the limit price is 12rs, the stock moves up to 11rs then the stop price is activated but the limit price is not executed

2.Partially filled the position: In the above example 100shares of the idea stock if there is less trading volume then only some portion of 10shares only trigged and executed remaining 90 shares are not executed because of the Bid (Ask) price variation

3.Commission: A broker can collect high brokerage or commission if the trader can place multiple orders due to partially filled positions.

Bottom Line: 

Stop-Limit orders are good for beginners but they do not learn the order type concepts. But in real-world trading, this order mitigates the Risk of the trade and it helps to take more profits and also, we can identify known loss of capital based on risk management which is affordable. 

Author: John Earla

About Author: Currently pursuing Financial Risk Management from GARP(US) and completed Graduation in Bcom computers. John is interested in finance and also Risk Analysis.

Related Post:

Market Order vs Limit Order

Related Posts

Leave a Reply

Your email address will not be published. Required fields are marked *