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How does a stop order and a stop limit order differ?
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Trading Order Types & Processes
How does a stop order and a stop limit order differ?
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Adam Hayes
Adam Hayes is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7 & 63 licenses. He currently researches and teaches at the Hebrew University in Jerusalem.
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Updated August 12, 2021
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Samantha Silberstein
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Samantha Silberstein
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Samantha Silberstein is a Certified Financial Planner, FINRA Series 7 and 63 licensed holder, State of California life, accident, and health insurance licensed agent, and CFA. She spends her days working with hundreds of employees from non-profit and higher education organizations on their personal financial plans.
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Trading Order Types & Processes
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Stop-Loss vs. Stop-Limit: An OverviewTraders will often enter stop orders to limit their potential losses or to capture profits on price swings. These types of orders are very common in stocks and especially in forex trading where small swings can equal big gains for traders but are also useful to the average investor with stock, option or forex trades. Show
There are two similar-sounding order types that are slightly different. The first, a stop order, triggers a market order when the price reaches a designated point. A stop limit order is a limit order entered when a designated price point is hit. Key Takeaways
Stop-Loss StrategyA stop order is commonly used in a stop-loss strategy where a trader enters a position but places an order to exit the position at a specified loss threshold. For example, if a trader buys a stock at $30 but wants to limit potential losses by exiting at a price of $25, they would enter a stop order to sell at $25. The stop order triggers if the stock falls to $25, at which point the trader's order becomes a market order and is executed at the next available bid. This means the order could fill lower than $25 or higher, depending on the next bid price. Note that a stop-loss can also be used by short sellers where the stop triggers a buy order to cover rather than a sale. A stop-loss is common, and in its basic form converts into a market order to sell once the stop price is triggered. However, in a fast moving market, the market order may be less than ideal, leading to larger losses than anticipated. One solution is to modify the stop order into a stop-limit order. Stop-Limit OrdersA stop-limit order is technically two order types combined, having both a stop price and limit price that can either be the same as the stop price or set at a different level. When the stop price is hit, the trader's limit order is entered. For example, if the trader in the previous scenario enters a stop at $25 with a limit of $24.50, the order triggers when the price falls to $25 but only fills at a price of $24.50 or better. This type of order, depending on the limit price entered, could end up being triggered but then not fill. It is possible the price could fall through the limit price before filling the entire order, leaving the trader with remaining shares at a greater loss than anticipated.
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Stop Limit OrdersThe Bottom LineStop-loss and stop-limit orders can provide different types of protection for both long and short investors. Stop-loss orders guarantee execution, while stop-limit orders guarantee the price.
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Related Terms
Stop-Limit Order Definition
A stop-limit order is a conditional trade over a set time frame that combines features of stop with those of a limit order and is used to mitigate risk.
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Stop Order Definition
A stop order is an order type that is triggered when the price of a security reaches the stop price level. It may then initiate a market or limit order.
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Order-Triggers-Two (OTT) Definition
An Order-Triggers-Two (OTT) condition is a contingency whereby when a primary order is filled, two secondary orders are placed as a result.
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What Does Above the Market Mean?
"Above the market" refers to an order to buy or sell at a price higher than the current market price.
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Order-Sends-Order (OSO/OTO) Definition
An order-sends-order (OSO), aka order-triggers-other (OTO), is a set of orders stipulating that if the primary order executes, then one or more secondary orders also will be placed.
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What Is a Market-If-Touched (MIT) Order?
A market-if-touched (MIT) order is a conditional order that becomes a market order when a security reaches a specified price.
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