Watch our video on the differences between a stop loss vs stop limit order.
Knowing the difference between a stop loss vs stop limit order and when to use them is important. While they may sound similar, they are in fact different. The video above explains the differences and our preference when using stop losses. You can also read below if you're less of a video person 🙂 Read More
Trading is a tug of war between buyers and sellers. As a result, there can be a lot of volatility. As day traders, volatility is necessary. Profit and loss is affected if risk management isn't used. How do we control this? Stop Loss and Stop Limit Orders is one way.
If you've been around trading at all, you've probably heard that trading is emotional. In fact, stock market trading is in essence, trading emotions.
Greed and fear drive markets and stocks. Learning how to control your emotions gives you the upper hand. However, while you're learning how to control emotion, using a stop loss vs stop limit order can go along away in helping protect your account from unnecessary woes.
They make you choose a profit and loss ratio. Which is incredibly important. You don't ever want to place a trade where you have the potential to lose more than you'd make. This is a natural part of trading. You need to have a plan, a stop, and a profit target before each trade. Otherwise you're gambling. And the stock market is NOT a casino. Well, for some it is...
So, that's why using a stop loss vs stop limit order is important. You have the levels in place to keep your trade on target if your emotions get the better of you (learn how to swing trade stocks in our free trading courses).
Is a stop loss vs stop limit order different? The answer is yes. A stop loss is an order that's placed with your broker to sell your stock when it reaches a certain price. You set the price in your trading software or in your account portal. You pick the number of shares (some or all) and if the stock hits the price. It executes.
A stop loss limits the loss on any position you enter. Not only does it protect long positions but setting a stop loss can protect a short position as well.
Traders use stop losses to take the emotion out of trading. Remember that trading is emotional. As a result, you can make bad decisions if you don't control your emotions. Ever regret saying something in anger? Or making a hasty decision without giving it the proper thought? A stop loss is that mental barrier that says STOP and THINK! This gives you time to reassess the position.
Don't feel bad if you get stopped. I get stopped out weekly on my trades. But I let my winners run. The best traders in the world get stopped sometimes. If they tell you otherwise they are full of...untruthfulness 🙂
A stop loss vs a stop limit order is different. In fact, a stop loss is set as a market order. As a result, you may set the stop level but it may fill at a much lower price because it's a market order.
If a stock is volatile and falling quickly, the order may fill well below the limit set or potentially not trigger at all. Stop limit orders can be seen as better than a market order (learn how to day trade stocks in our free trading courses).
A stop limit order combines both a stop and a limit order. A limit order is an order where you as the trader choose the price you want the trade to fill at. Sometimes this is better because you know your position size, you know there is liquidity and that you're likely to fill.
In other words, you set the number of shares you want to buy at a specified price. As a result, the trade fills at either the limit price or a better.
However, if the limit price is never reached the order may not fill. This is what differentiates a market order from a limit order. The market order fills at whatever price the stock is trading at.
What I do to negate this, is set an alert with my broker at a specific level that a stock hits. That's a surefire way to get an alert via text and email when price hits a level. Then I know to check my stop limit and see if it filled. If it did not, I set another order to sell. First I cancel my stop limit then I put in the new order. I use TrendSpider to set customized alerts using multi-time frame analysis.
So stop loss (market orders) are a little riskier. That is because you have no control over what entry you get and why a lot of traders prefer limit orders. A stop limit order is the limit order that includes a stop loss. I hope that makes sense to you, if not keep reading.
The order becomes a limit order to buy or sell at the limit price or better once stop stop is hit. When you combine the two orders your trade precision at executing the trade is a lot higher.
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In a stop loss vs stop limit order you can set a stop loss. However, we often like to use mental stops. A mental stop is something you should work towards. A mental stop means you have a set price you're going to sell at if a trade goes against you. Again, you have to set an alert for a price level outside your broker, ideally. You need to set an alert is the biggest thing, because you will need to stop what you're doing and sell. Luckily with smart phones, this is easy.
Instead of placing that order with your broker, you keep that price in mind. Then once price hits that level, you sell no matter what. Don't make excuses and hope that it goes back up or back down or whatever. You really want to stick to this, if you're going to be successful long term.
Many traders use mental stops that way no one else knows how much they're willing to risk. A Mental stop is not sitting out there in the system, so no one can see it. No one knows your plan. If your order is sitting out there, it is seen on Level 2. Level 2 is a tool used by market makers, High Frequencies traders and algos to see where buyers and sellers are at.
As a result, they can trigger those stops which stops you out before the stock rips again. They do this by "stop hunting" meaning they will push the price of the stock down by selling at the bid, just to hit your stop. Sounds messed up right? It happens. However, when you have that mental stop in place, then they can't tell where your risk limit is.
This is also why we prefer mental stops. Sticking to the mental stop takes incredible discipline. If you want ot be a good trader, you're ging to have to train your mind.
It's easy to want to stay in a trade when you start taking a loss because you want to recover that loss. However, that usually means you end up losing more on the trade than you would have if you'd sold at your mental stop.
You're going to need to practice trading using mental stops. Open a practice account with TD Ameritrade. Take our Thinkorswim Tutorial to learn how to setup your paper trading account. We also have a lot of stock market trading resources on our website to help you get started with trading. It's free, so you have no excuse to not take them 🙂
Why is trading using a stop loss vs stop limit order important? Because risk management is going to be your saving grace. It's that loyal friend who has your back. THe one who is always willing to give you a ride or help you move your furniture.
There's the saying "plan your trade and trade your plan". That is probably the best advice out there for trading; especially when you're new. Don't take trading lightly, your money is serious business.
Trading using proper risk management is going to save you when your emotions want to get the best of you. It's going to happen no matter how seasoned you are. That's what separates the winners from the losers. We want you to be a winner!
You won't always get the best entry and sometimes your trades will go against you. Setting those stop levels will keep you from losing more than you need to. Even if the market makers can see it, dont swet it to much. Protection is better than no protection.
It's the most simple way to trade but also the most ignored. That's why a stop loss vs stop limit order is important if you can't stick to a mental stop. We teach how to use mental stops when doing live trading within our trading room, so check out our trading service.
A stop loss vs stop limit order is a way to keep your emotions in check when trading. It's important to practice trading using these tools. When you practice, you're learning what works best for you and how to control your emotions. As a result, you become a better trader and when you use real money, you're not panicking because you've practiced.
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