how stop limit orders work
the primary benefit of a stop limit order is that the trader has precise control over when the order should be filled the downside as with all limit orders is that the trade is not guaranteed to be executed if the stock commodity does not reach the stop price during the specified time period a stop limit order requires the setting of two price points the stop price and the limit price first set the stop price which is the price at which you want the trade to be triggered if the price of the security reaches or falls below the stop price the trade will be triggered once these have been setthen set the limit price the limit price is the price at which you want to buy or sell the security this price is used to limit the maximum price you will pay or the minimum price you will receive for the trade a time frame must also be set during which the stop limit order is considered executable the stop limit order will be executed at a specified price or better after a given stop price has been reached once the stop price is reached the stop limit order becomes a limit order to buy or sell at the limit price or better this type of order is an available option with nearly every online broker it s important to note that stop limit orders do not guarantee that your trade will be executed if the price of the security drops quickly or there is a gap in trading the order may not be filled at the desired limit price or at all 1 this may result in missed opportunities for profit should the appropriate prices not be targeted features of stop and limit ordersa stop order is an order that becomes executable once a set price has been reached and is then filled at the current market price a traditional stop order will be filled in its entirety regardless of any changes in the current market price as the trades are completed a limit order is one that is set at a certain price it is only executable at times when the trade can be performed at the limit price or at a price that is considered more favorable than the limit price if trading activity causes the price to become unfavorable regarding the limit price then the activity related to the order will be ceased by combining the two orders the investor has much greater precision in executing the trade a stop order is filled at the market price after the stop price has been hit regardless of whether the price changes to an unfavorable position this can lead to trades being completed at less than desirable prices should the market adjust quickly combining the stop order with the features of a limit order ensures that the order will not get filled once the pricing becomes unfavorable based on the investor s limit thus in a stop limit order after the stop price is triggered the limit order takes effect to ensure that the order is not completed unless the price is at or better than the limit price that the investor has specified 1stop limit orders are commonly free to enter into ensure you understand your broker s fee structure before setting orders and unexpectedly being assessed order fees advantages and disadvantages of stop limit ordersthere are several reasons why traders may rely heavily on stop limit orders as there are a handful of strong benefits of the order though stop limit orders have a suite of strong uses there are also drawbacks to the product allows investors to largely control the price in which they enter or exit a tradeallows investors to ensure an order doesn t get filled at too high or low of a price mitigating some trading riskmay allows for a more passive automated style of tradingmay be used in a variety of trading situationsmay not execute if the price never meets the limit price