Stop limit orders are a conditional trade over a set time frame that combines the features of a stop with those of a limit order and is used to mitigate risk. In other words, stop limit orders allow you to place an order where you choose the purchase or sale price with a stop loss in place. In essence, you need to have two price points before placing the order. The first price point is your stop loss price. The second price point is the amount you want the trade to fill at.
There are many ways to make yourself a better trader and stop limit orders are one of those ways. There are different methods to placing a trade as well as types of trades to place. As a result, you want to choose the best possible order to make your trades more profitable. It’s one of those small details that can make a world of difference.
Using Stop Limit Orders
- The market is a tug of war between the bulls and the bears.
- As a result, volatility is always a factor. Which, in fact, is a good thing.
- As day traders, we are hunters of volatility.
- However, placing a trade that goes against you can and will result in taking a loss.
Practicing proper risk management is imperative to protecting yourself. It doesn’t matter how good of a trader you are; if you don’t practice risk management, you could lose it all in one trade.
Stop limit orders are a tool to having good risk management. The goal of any trader is to make money. If it wasn’t, no one would be trading the stock market.
This means that we can allow ourselves to get emotional when it comes to trading. With emotion clouding our judgement, we don’t always make the best decisions.
However, when we put good trading boundaries in place, we protect ourselves. That way we’re not taking a bigger loss than needed.
Stop Limit Order Fills
One of the reasons people use limit orders is that you have fill control over how your trade is executed. Whereas with market orders, you get whatever the market gives you.
The drawback to stop limit orders is that there is no guarantee that your limit order will fill. If price doesn’t reach the stop price in the allotted time, it’s more probable than not your order isn’t getting filled.
Hence why some traders prefer the market orders. Their trade is getting filled no matter what. However, that can mean you’re getting a bad position depending on what the market is doing when you place the market order.
Why Use a Stop Loss?
Is the stop part of stop limit order important? Yes it is. When you set a stop loss, you’re drawing a line in the sand at how much you’re willing to lose.
That’s essential to protecting your brokerage account. All new traders should map out their risk to reward ratio. What are you risking versus how much you can make?
If your risk is more than your reward, that’s a trade you shouldn’t be taking. If you’re willing to risk 10 cents to make 20 cents then stop limit orders would be placed with those two price points.
It’s important to remember that stop limit orders can have market makers trigger the stop loss. That can cause your trade to stop out and then rip.
As a new trader, that can be extremely frustrating. However, if you get a bad entry on a pattern or candle, it can also protect you.
We recommend opening a paper trading account with Thinkorswim so you can practice making stop limit order trades. It’s super important to place a few hundred practice trades before going live.
That way you can get a good feel for the overall process and work out the kinks. That way when you go live, you’re not trying to figure things out on the fly.
Trailing Stop Limit Order
- A trailing stop is a type of order that triggers the limit order when price is triggered to buy or sell at the trailing price you choose that’s below the peak price for selling or above the lowest price for buying
The Mental Stop
As a new trader, you should practice placing your stop loss order in the system in a virtual account. However, once you get more comfortable, practice using mental stops.
You have to be incredibly disciplined to use a mental stop. You may have heard the saying “plan your trade and trade your plan”. Those are words to live by.
Many times as traders, when we break from our trading plan, our biggest losses occur. Stop limit orders can alleviate the loss because a stop is in place.
However, using mental stops don’t let other traders know what your risk limit is. Then they can’t try to trigger your stop. Many times a highly volatile stock will trigger a stop within seconds before ripping.
That is very frustrating to traders. Many times those levels are hit because other traders see the stop losses through different tools like Level 2.
With a mental stop, they can’t see that and have no way of knowing what price target to hit. However, if you don’t close out the trade when your mental stop is hit, you could potentially take more of a loss then you intended.
Stop Limit Orders & Technicals
Using support and resistance as part of your stop limit orders can help you get the most profit potential. These are levels that all traders pay close attention to.
Setting your stop loss a little below support with your profit target at resistance is usually a good plan. That way you have the room for a stock to move.
You can use candlesticks, patterns and technical indicators is help find support and resistance. Technical tools like VWAP are a big part of day trading. Using the tools given to you can help make stop limit orders a successful trading tool.
Stop limit orders allow you to be in full control of when your order fills. However, it’s important to remember that the risk is not getting your order filled. Although the reward for this type of order usually outweighs the risk.