Using a stop limit on your orders can be tricky because it is a combination of a stop order and a limit order. In a stop order, if the stock price trades through the stop price, the order changes to a market order and, though the stock may sell at a much lower price, it will sell. If you add a limit to your stop order, your stock may not sell at all if the price trades through the stop limit price. That is because a limit order limits the price at which the stock may trade, to the trigger price or better.
1. Select your trigger price according to whether you are trying to protect a profit or avoid a loss. Many traders set their trigger prices 2 percent lower than their cost price, particularly if the cost price is a support point. If you are trying to protect a profit, set the trigger price 5 percent below the current market price to reduce the chance of being picked off by the market maker.
2. Place your order to read "Sell xxx shares of ABC at 50, stop limit." Make your order good till canceled by adding "GTC" to the order. This will keep the order active until you cancel it. Some firms have restrictions on limit orders and GTC orders, so ask about policies before placing your order.
3. Monitor your order. If you are trying to protect a profit or avoid a loss, a stop limit order may never be executed if the stock price trades through your stop. In a fast market, if you have a stop limit at 50, and the price trades through 50, your stock will not be sold unless the market price trades back up to 50. In a fast market you may be better served by canceling the stop limit order and entering an order to sell at market.
- Stop-limit orders are usually sell orders, but they can also be used to buy stock at a specific price. Such orders are used to cover a short position to protect against loss if the market price of the stock rises. They are also used to buy into a position if the stock trades up through a technical resistance point.
- Many professional traders caution against using limit orders unless you are an experienced trader. A stop triggers a market order and your stock takes its place in line waiting for a bid. The market maker fills bids as the sell orders come in, and if there are more orders to sell than orders to buy, your stock may sell at a much lower price than your stop. However, if you limit the price it can be sold by using a stop-limit order, your stock may not sell at all as the stock price continues to decline.
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