Stop-Limit Order

A stop-limit order is a type of order that combines the features of a stop order and a limit order. A stop order is an order to buy or sell a stock once the price reaches a certain level, known as the stop price. A limit order is an order to buy or sell a stock at a specific price or better.

A stop-limit order is used to limit the potential losses on a trade. For example, if you are long a stock and you want to protect yourself from a decline in the price, you could place a stop-limit order to sell the stock once the price reaches a certain level. The stop price would be set below the current market price, and the limit price would be set below the stop price. This would ensure that you would not sell the stock for less than the limit price.

Stop-limit orders can also be used to take profits on a trade. For example, if you are short a stock and you want to lock in a profit, you could place a stop-limit order to buy the stock once the price reaches a certain level. The stop price would be set above the current market price, and the limit price would be set above the stop price. This would ensure that you would not buy the stock for more than the limit price.

It is important to note that stop-limit orders are not guaranteed to be executed. If the market moves quickly, the stock may trade through the stop price before the limit price is reached. In this case, the order would be executed at the market price.

Stop-limit orders can be a useful tool for managing risk and taking profits on trades. However, it is important to understand how they work before using them.