Part Four: Stop Limit Order
The best of both stop and limit orders
Once you understand stop and limit orders, understanding the stop limit order is pretty straightforward. The issues we described that face the stop order are avoided when you pair it with a limit order, with one caveat, which we’ll address momentarily.
On our example above, we’ve set a stop price of $50 for $VT, assuming we’re going to sell it at that price. But because we’ve also set a limit, we won’t sell for anything less than $49. So we don’t have to worry about selling for $30, similar to the case we described in relation to $LNKD in the discussion of stop orders.
In the case of an order to buy, with a stop limit order, what we’re saying is that we are willing to pay a certain amount, say, a stop price of $60, but we might set a limit of $61, saying we’re not willing to pay more than $61 per share. This might be useful in the case of the technical trader making decisions based on support levels. But frankly, this is really the only case where we can think one might use a stop limit order to buy in a situation where one isn’t already short the stock. It’s a bit of a weird bird.
So, that one caveat. When you add a limit to a stop order, you will, of course, face the possibility that the stock “gaps” right past the limit you’ve placed. $VT could jump in a single trade from $51 to $48, and we wouldn’t get triggered or executed. So now we’re stuck with a stock that may be heading downward. The lesson here is really the lesson that applies to every type of order – no order is foolproof, so you must always monitor your positions if you think you’ll be buying or selling soon.