Stop Loss vs Stop Limit: when do you need to use them?

A lot of people who trade on financial markets are confused by some words that are similar in meaning: Stop Loss vs Stop Limit (below we will also use SL vs Limits). What’s the difference between these terms? All of these words are used for making limitations on losses on Forex, stocks market, cryptocurrency market, and other financial markets. But they aren’t identical terms. Orders are widely used among traders because they can make trading simpler and more profitable for traders. 

However, we have a lot of types of orders that we can make on financial markets and which are important if the profit in the long-term prospects is important for you. It isn’t only the orders that we are going to describe today. The simplest one is a standard order when a financial instrument is bought immediately, not depending on the quotes. It is at the base of Stop Loss. We will talk about it later. 

Other kinds work in the situations of reaching a definite quote by a financial instrument. Limits are affected by a certain quote and perform buying or selling of the financial instrument if it is reached. There are different kinds of orders that protect us from losses.

Stop Loss Order

It is a type of operation that is usually used for shares. However, it may be used for trading other financial instruments, such as currency, cryptocurrency, etc. According to the order, you or your manager sells the chosen shares if they fall below a defined level.

Imagine that you are the owner of a Stock A. Now, it is sold at 12 dollars. However, its cost is decreasing. You make a stop-loss at 10 dollars. If Stock A reaches the level of 10 dollars, your broker or special software/trading platform will try to sell them immediately because this financial asset begins to sell at a critical quote. More precisely, at a price that is almost the same as the one you set.

This process is often called “converting to a market order”. The Stop loss just becomes a standard market order for purchasing or selling the financial instrument. This difference is valuable: stop-loss can’t guarantee a cost that is set by a trader. The real income will depend on how the quotes will change after the operation. 

Imagine that a certain financial instrument costs 10 dollars. Your stop-loss will be changed to the market order. The corresponding asset will be sold at this time. However, simultaneously with making an order process, the quotation will be decreased by 0,15 dollars. It means that the real quotation will be 9,85. 

As an alternative, the direction might be different. The cost is 10 dollars but SL doesn’t take into account the circumstances that have been changed. That’s why the real quotation for this asset reaches 11,50 dollars. It is a small profit. Why is it valuable? Limits that will be described below, work only with these situations.

SL is also used for purchasing shares. It is possible when you make a short order with an expectation that the quotation will fall. For instance, you buy the financial instrument and the quotation has grown to 15 dollars. It has the following meaning. It grows to this level, your trading platform will make a market order.

What are Limits?

Stop-limits are created for smoothing some unpredictable aspects of SL. The portfolio makes an order with an unpredictable price if you use SL. Our selling of share A will start at 10 USD for one, but we are not able to control the quotations of the instruments that will actually be traded.

The task of Limits is to find a solution for the problem. When quotes reach a defined level, this order is simply changed. 

Limits are something like a guide for making an operation at a definite price or better in a certain trading situation. To put it simpler, the rules will be different depending on the kind of trend. Quotes can be lower if it is profitable or higher if it is associated with income. Limits don’t make any unprofitable orders, which is a significant moment!

Each trader can specify what at quotes they want to sell a certain financial instrument for. In some cases, it is very useful for traders.

Let’s give a real example of their usage in practice. Imagine, you created a Limit for share A. The quote is 10 dollars, and the limit is 8 dollars. If the quotes for the shares A reach 10 dollars or below, the order will be turned into a limit at a price of 8 USD. Our investment portfolio will sell our instrument at any quotation that is equal to 8 dollars or above. If the cost is decreasing very fast and our portfolio isn’t able to sell it at a certain price, it won’t be sold. 

Stop-loss or stop-limit: what is better?

Stop Loss vs Stop Limit: these types compete with each other but not in the same situations. Stop-limit types of orders are extremely useful in situations when the currency or stocks are very changeable. For example, when the important news appears. It helps you make selling orders but only within certain borders that create some limitations.

If our share A reaches 10 dollars and next it reduces to 4 dollars for one share, it is a very big loss of your investments. At this quote, you might keep your asset with the hope that it returns at least part of its value. 

Stop-limit order makes your positions more flexible. It sells shares but only in a certain range. If you used SL, it would sell the instruments you previously purchased at 4 dollars. You will lose significantly more than expected. 

On the other side, the price is guaranteed by the stop-loss. Limits are great but in some cases, they don’t sell assets. You should take this fact into account.

Imagine that share A is sold at 7 dollars for one. It is lower than your stop-price (10 dollars) and the limitation is 8 dollars. Therefore, your trading platform will wait until the quotation becomes 8 dollars. 

If after a whole day (or another period that you set on the platform) the price of your shares is traded at 5 dollars per one share during the certain period of time and never recovers, you lose your opportunity to sell at 7 dollars for one share.

You try to decrease losses but really you increase them. This tool was bad in this case.

Recommendations on trading

Now that we have understood Stop Loss vs Stop Limit, what is better? These instruments are quite different but each of them is the best in certain cases.

To make your deals more profitable and less unprofitable, you should follow some recommendations:

  1. Ask your financial consultant about the most corresponding type of order in a certain case. It isn’t a very hard task to find an advisor that fits your financial needs. There are a lot of free tools that can choose financial consultants in 5 minutes near the place you live. If you are going to collaborate with consultants, your chances will increase very fast.
  2. Before you start purchasing assets, it is valuable to know the vocabulary of the investment world. It isn’t only terms, it is a method of thinking. Depending on the goal to perform a transaction immediately or wait until some requirements will be executed, you will be supposed to place a different kind of order via a broker.

However, it isn’t a difficult topic. But you need to know the point of SL or order limits. What is the point? It is affected by the trading signals and indicators you use. Try your trading strategy on historical data before you create a certain order. If we talk about Fidelity, the Stop Limit order is more precise when you want to fix losses only at a certain price. 

Wrapping up

We see that the difference is very significant when a person trades on financial markets. The first is needed when you want to fix losses at a certain level. Stop Loss can guarantee the order but Stop Limit can’t do it. 

What option do you need to use? It depends on what is important to you. If the market is very volatile, you’d better use Stop Limit. If the market isn’t changeable much, SL can be the right option for you. 

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Written by:


Carolyn Huntington is an economist, professional trader, and analyst. She made her first big deal in her student years with a profitable investment in Facebook stock. Now the total experience of her trade is 18 years. Over the years of trading, Carolyn has developed its own strategy that allows even those who have never traded on the stock exchange before to earn money. She also creates market forecasts and advises major shareholders, compiles investment portfolios, and teaches how to work with automated advisors.

telephone: 503-547-5192