Stop Limit Order Strategy

What is a stop-limit order?

A stop-limit order is an order where traders define two prices: stop-loss price and the limit price. If the price reaches the stop price level, a new limit order will automatically trigger buying or selling the asset.


Stop limit order example.

For example, you create a BUY order at the price of $100.You define stop limit order and represent two prices: BUY stop-loss order is $98, and BUY limit order is $95. If the price touches $98, it will close your trade at $98. But if the price falls below $98 and hits $95, the BUY order will be filled. If the price goes much below 95, for example, a limit BUY order will not be created during the weekend gap.

Look at this example when we have different levels for stop and limit order:

Difference between stop price and limit price?

  • The stop price is a price level that is always below the current price level if traders make a BUY order, while the limit price is a price level that is always above the current price level if traders make a BUY order.
  • The stop price is a price level that is always above the current price level if traders make a SELL order, while the limit price is a price level that is always below the current price level if traders make a SELL order.

Understanding Stop and Limit Orders Strategy to Minimize Risk

The University of California found out in 2010 that before 24 months, the new short-term marketers in the market (almost 80%) quit their businesses. The standard agreement estimates that 95% of the marketers choose an early exit from the market; the fact is that it doesn’t matter which one of the above stats is genuine because it is visible that the probability stacked is in opposition to the marketer.

Risk management is commonly an unnoticed factor that might be one of the most factors that can help conquer these unconquerable odds. To strengthen the survival of the business, risk management should be considered an essential factor.

Being clear about entering and exiting the market can be beneficial to make the risk management method work.

Order Types

If you are giving your full attention and focus to the market, it can bring great opportunities and challenges. A good strategy to enter and exit with full effectiveness is mandatory if one wants to sustain and build a constantly changing business.

The good news is that many tools are available to increase the trading effectiveness to help the trader. The main motive of any business should not be compromised, and to make sure of this, the unique order types are beneficial.

Market orders- If someone wants a quick entry into the market, then market order makes it easy and possible. The market orders can be executed very quickly at the market after it is placed at the exchange.

You can read in our article more about MT4 order types.

Difference between buy limit and buy stop order.

Limit orders- If you want to buy some product and sell it at a higher price, then the limit order is beneficial. One thing which is essential if you are placing orders by yourself in a trading DOM, then one thing you have to keep in your mind is that if it is a buy, then the price must be below the market price, and if it is a sell, then the price must be above.

Stop orders- The main primary of a stop order is to ensure that a trade’s exit upon a particular price is hit. It is also known as “stop-loss.” It is always placed at a definite price. When the stop order is hit, the market order begins, which helps in closing the trade.

As for investing and trading, one thing that is for sure is you cannot rule out a risk. The only thing you can do is you can bring down the risk to the minimum possible. This will help you get an earning on your investment, howsoever small it may be. For this, you need to go through a strategy or multiple strategies. However, the reality is that the strategy might look sound, yet they concern the wake. So we’ll discuss here the diverse aspects of the stop limit order strategy.

Limit Order vs. Stop order

If you buy a broker or a brokerage agency’s services, they will show the various options available when you plan to sell your shares in the market. A few may be amply simple of the options; it’s easy for you to grasp them. However, there are some you cannot. One of such challenging notions is ‘stop-limit order.’ A stop-limit order is a bundle of two other sorts of market orders. So what is the difference between these two options – what makes them distinct from each other? Why do traders apply it?

Let’s understand the stop-limit order better.

As the name indicates, a stop-limit order is a bundle of instances to stop and reduce the orFor example, ifrs. An order in this context refers to buying selling only when they come to a certain threshold. In other words, they are a set of two prices associated with a stop-limit order.

Buy stop-limit order example.

Take an example of shares priced at $25. And, you hope they may rise today. But, once you buy the share at $30, you impose a stop. When the share price reaches $30, your order is executed and becomes a market order.

You can also put a cap on the price as a stop-limit order. If the limit price is $32, it’s the highest amount you can pay for one share. If the share price becomes $30 and an order is processed before the price becomes more than 32, your order is made. If the price does not reach that level, the order is not placed.

Sell stop-limit order example.

Thy way a sell stop-limit order works is similar. Let’s suppose an investor owns the $30 stock. However, they visualize a fall in its price. If you fix the stop price at $28 when the price comes to that level, your order starts working; if you improve the limit at $26 to the minimum price, you are ready to sell the share.

If no sale is executed before the price declines below 26, your order is not completed. In such a case, you should hope the share price to return to $26 or higher so you could sell the share to gain.

Implementing stop and limit orders – Stop Limit Order Strategy in a simple example

Here are some examples that will help you know how you can use stop and limit orders by which you can make the trade with ease and without any confusion.

1-A person wants to start a business in some products. He is purchasing at suppose 30 dollars. He is expecting a 20% profit at the risk of 20%.

2- The market price is 30.25 dollars

3- He will buy a limit commodity at 30 dollars on the trading DOM

4- In 29.75$, a sell stop order is placed. If the price doesn’t go well with the entry, then the stop order will become even.

5- The price goes back 30 dollars

6- He will sell limit order at 30.25 dollars

7- If everything goes well, he will get the 30.25 conversion rate, and a 250$ profit will be made.

Stop Limit Order Strategy in forex trading.

Here is one of my very often cases when I use the stop limit order strategy :

Step 1: Find critical levels – weekly and monthly low and high, Fib. Levels, high price necessary level.
Step 2: Set pending limit sell order when the price hits resistance level or set pending limit buy order when the price hits support level.

Example :
Let us watch the EURUSD pair in September 2019.
We found on the red chart resistance and blue support. So we set lines on a chart like this :
support and reistance pending limit order

Now we want to buy EURUSD. We set a pa ending BUY limit order when the price touch the blue support line. We wait to execute. In one moment, the price will hit support level :
buy limit order executed on eurusd chart

After that, we try to hit the target as previous resistance.

Stop-limit order and stop-loss order compared – the difference between stop and limit order.

What is the difference between a stop-loss order and stop-limit order? A stop-loss order is another way of defining a stop order involving selling shares. If you’re planning to sell shares, estimate the price at which to start an order. In the early example of a $30 share, the price falls to $28. There is no limit price in the stop-loss order,e as is the case in the stop-limit order. The market order is executed once triggered.

If you sell shares of a company whose shares are sold a lot, you may not experience much difference because an order takes time to be executed by the time the limit price is achieved. However, if a stock is not traded well or is a volatile one, applying a stop-loss strategy may make you sell your share at a lower price than you were planning to.

When should I apply stop-limit order?

As you execute, you’d like to influence a transaction’s outcome to the maximum possible extent. It’s precisely this factor that causes you to apply stop-limit order instead of a stop order, also known as a stop-loss order. When you use for a stop-limit order, you place an order to limit stock buying. Along with this, you also limit the highest amount of money you wish to spend for the purpose. In the case of selling, you can limit the sale of shares and thus, can reduce the losses that you otherwise have to incur when the situation goes beyond control.

The control is helpful, as mentioned beforYouof highly volatile stock. A buy-stop order is executed when the stoc when placing the orderk reaches the price. But if the change is happening faster with no limit price, you will have to pay more than expected at the beginning. When you sell a volatile stock without a limit price, it means that you’re likely to sell it much lower than you did at the beginning.

Traders can estimate when to stop the stop-limit order. You can execute the orders only during standard market hours. When placing the order, you can choose it for the current period or extend it to a later market. If your option is the extended market period, the order is in force until it’s executed. If your option is only for the designated day, it expires if the order is not in place.

Risks in a stop-limit order

Stop-limit order not executed.

The most significant risk in a stop-limit order is that non-execution. This is important when selling. The order may expire before execution. Or, the stock may drop below the limit price you expected. Thus, you’re in a downturn spiral. You can wait and expect the price to rise to the limit price. However, if the order no longer works (expires) or is canceled, you may have to apply a general market order to stop the order from selling at a price much less than the expected price.

Risk of an order partially executed.

The other thing that makes your concern regarding stop-limit order is the chance of an order being partly executed. For example, if you’re planning to sell 300 shares, and the price falls below the limit price when only 200 shares are sold, 100 are not executed. This is a commonplace risk involved in stop-limit orders. Therefore, you should be aware of the probability of the decline before placing the order. You are likely to execute a stop-loss order if you visualize that your order may not be executed.

The risks may make traders lose nerves and make them reluctant to make stop-limit orders. Rightly so.

Everything has its advantages and disadvantages. So here are some benefits of using stop and limit order.

By using a limit order, one can easily predict the risk. Any mistake can lead to a loss, so never use a market to enter the market when the price moves towards the entry.
It also improves risk management. You can locate the profit targets and stop losses with complete certainty with the help of involved risk and profit.

Drawbacks of a limit and stop strategy

It does not make sure that the limit order is filled. It is essential to know all the market details, and you have to do it with both the trade entry and profit target.

There is also a possibility of missing a trade. If this happens then, the price only rises to 50.01 dollars, and chances of no profit also arise.

Starting the limit and stop orders

If you want to grow and be profitable, you need to work with passion, dedication, and total focus. It would help if you always were learning new methods and strategies about the marketplace, and most importantly, a never-give-up attitude and a competitive spirit are the first that you will need.
A stop-limit order is the best option for visualizing a definite highest time for buying or a minimum for selling. They are not the orders you can rely on frequently. However, you could frame a stop-limit order strategy to execute it carefully.



Igor has been a trader since 2007. Currently, Igor works for several prop trading companies. He is an expert in financial niche, long-term trading, and weekly technical levels. The primary field of Igor's research is the application of machine learning in algorithmic trading. Education: Computer Engineering and Ph.D. in machine learning. Igor regularly publishes trading-related videos on the Fxigor Youtube channel. To contact Igor write on:

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