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A Brief Overview Of The Stop And Stop-Limit Orders

by Busines Newswire
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Novice traders rarely think about whether the existing market price is optimal. This often leads to increased risks and reduced potential profits, which is why experienced market participants use pending orders. 

Let’s analyse the characteristics of executing various orders and in what cases they should be used.

Stop Orders And Stop-Limit Orders

You can use a stop order to instruct the stock market to purchase or sell a stock at an established price automatically. When the price is hit, it results in an immediate order being fulfilled at the marketing price.

Investors should be aware that the stop price may not guarantee their trade execution, especially during fast-paced markets. Investors can protect themselves by utilising a stop-limit order (SLO), which includes a price limit to ensure the order is accomplished at the predetermined price or higher. Nevertheless, the order may not be fulfilled due to the price limit.

An SLO encompasses both stop and limit order attributes. Once the stopping price is met, an SLO becomes a limit order and will be executed at a precise price or a better one. In this order type, the investor has the freedom to determine the price for their investment purchase or sale.

However, an SLO may not be accomplished if the stock’s price moves away from the specified limiting price, which may occur in a fast-paced market. The stopping and limiting prices for an SLO do not have to be the same price.

Application Of Stop and Stop-Limit Orders

The implementation of stop and SLOs by traders is determined by their goals, risk appetite, and market instability. Protecting profits and minimising losses is a common goal for trend-following traders who use stop orders. 

Range traders use stop orders to accomplish trades when prices surpass specific support or resistance levels. Traders in scalp trading have the option to use stop orders or SLOs based on their preference for fast trading or order control.

Final Thoughts

Pending orders are crucial for successful trading, saving time for experienced traders, controlling loss risks, and managing funds on the balance sheet, as they help control losses and manage funds effectively. 

Understanding their characteristics enhances trading outcomes. Investors should carefully consider the risks associated with both SOs and SLOs when deciding whether to use them.