Trading Concepts: Stop-Limit Order 

There are various conditional trades, one being a stop-limit order, that can be used over a given time period. A stop-limit order is used to reduce risk and has been set up to in much the same way as limit order (execution of a trade at a predefined price or higher) as well as stop-on-quote orders (which refers to an order being executed after the price of the security breaks through a given price-level). 

Understanding what a stop-limit order is 

So, how do stop-limit orders actually work? There are two price points that need to be set as well as a time frame which indicates for how long the stop-limit can be executed. The two price points include: 

• Stop: Beginning of the predefined price target for the trade.
• Limit: Price levels outside of the price target. 

The reason traders use stop-limit orders is to pinpoint exactly when an order is filled with the price target in mind. However, it’s quite possible that trades which utilize stop-limit orders are at risk of not being filled if the desired price is not reached within the given allotment of time.

If, however, the stop price is reached then the stop-limit order will be triggered at the desired price level or higher. It’s an order type which is commonly used by traders and one which is featured on just about all online trading sites. 

Stop-Limit Order Vs Stop-Loss 

When it comes to stop orders, it is important to know what purposes a stop-limit and stop-loss order fulfills. 

• Stop-limit: Guarantees a fill at a predetermined price. 
• Stop-loss: Ensures execution when required. 

Stop-loss orders come into effect when the level of the stop-loss order has been surpassed. If a trader has taken out a long position on a security, and the price suddenly falls drastically, it’s possible that a stop-loss order is filled at a price which is far below what the stop-loss order was originally set at. Alternatively, if a stock gaps upwards instead of down, then those who have taken a short position are at risk. 

Stop-limit orders make use of the features which are inherent in limit orders and stop-loss orders. A trader can enact a limit price and any order will then be filled at that limit price level or higher. Importantly, traders need to be aware that risk associated with limit orders is that the order never gets filled. 

Characteristics of Stop Orders and Limit Orders 

Stop orders have long been used to ensure that an order can be executed once a given price is reached while also being filled at the presiding market price. 

Limit orders are also set at a desired price point but can only be executed at the limit price or a price which is better than the predetermined limit price. Thus, if subsequent trading is not in line with the limit price or better, then the execution of trades won’t take place. 

It has since been established that joining stop and limit orders offers more dynamic trading options while using a feature which is very precise in terms of trade execution. 

Once the stop price is reached, then a stop order is filled at the current market price; no matter if the actual price has shifted to one which is less than ideal. It’s one of the main disadvantages of a stop order and why stop order and limit order features have been combined to ensure that an order is not filled at a disadvantageous price. 

Duration of stop-limit orders

There are two different time-spans for stop-limit orders. The first is a stop-limit order which is set as a day order and expires at the end of the trading session on any given working day throughout the week. 

Alternatively, stop-limits can be utilized as good-’til canceled (GTC) orders which do not expire at the end of a trading session but rather carry over. Bear in mind that these do still have an expiration date but different online trading platforms will implement different terms pertaining to GTC orders, and we recommend that you double-check the expiry of such an order before enacting it. 

Are stop-limit orders in effect after hours?

It’s important to note that stop-loss orders will come into effect at any point during the normal working hours of the market. This is usually from around 09:30 to 16:00 and does not extend beyond the standard trading session which includes weekends and public holidays.