A Stop Limit Order Protects

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A stop limit order is used as a protective sell when you cannot watch the markets or have found that when the time comes you cannot pull the trigger and get out of a losing position.

With this type of order you place a sell stop order with your broker and also a lower limit which tells the broker you will not sell below this level.

As an example, say you purchased a $20 stock and wanted to sell it once is went below $19. You would then place a sell stop at $19. This tells the broker that once the stock price hits or trades below $19 you want them to sell the stock at market.

Concerned About Unlimited Downside Risk?

With a stop loss order in place at $19, when the stock gaps down to say $18 your stock will be sold at $18. If this bothers you then place a stop limit order which means that you will add a limit to your stop loss. So while your stop loss order will say sell at $19, your stop loss limit order will say sell at $19 but I will not sell below $18.90. By adding the limit you are telling your broker that you will only sell the stock if you can get at least $18.90.

One reason you might use this type of order is to ensure that someone does not place a low ball bid and successfully get your shares.

A Watch Out

Generally though, since the first loss is the best, it is likely better to just enter a stop loss order and live with the odd time a really low bid is accepted. Ultimately you will run into a situation where the stock blows through your stop limit order and keeps going down. So while you could have gotten out at say 18.74 the stock closes at 17.52 and continues down from there.

This is one of the largest concerns with placing limits on your stop orders. You may find, that at some point, you will lose far more because you placed a stop limit vs a stop loss order.

You have to remember that when you place these types of orders in the market they will not always work out as planned. Stops, no matter where you place them, will cause you grief. Too tight and you sell prematurely. Too loose and you will lose too much money when the stock goes against you.

Unsure about limit and market orders then find out a bit more here to help you understand stop limit order.

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