If you’re new to trading, you’ve probably come across the terms stop loss and stop limit and wondered what exactly sets them apart. Both are tools designed to help you manage risk and protect your money, but they don’t work the same way, and using the wrong one can lead to unexpected results.
In simple terms, a stop-loss order automatically sells your asset once the price falls to a certain level, no matter what. It’s built for speed and guarantees your order goes through. A stop-limit order also triggers at a set price, but it will only sell at your exact price or better, so it may not execute if the market moves too quickly.
Don’t worry if that sounds confusing right now. By the end of this article, you’ll have a clear understanding of how both order types work, when to use each one, and how to apply them to protect your trades like a pro.
What is a stop-loss order?
A Stop-Loss order is a pending order that automatically buys or sells an asset when it reaches a specified price. A Stop-Loss order aims to limit losses by closing out a position when the security’s price falls below a certain threshold.
What is a Stop-Limit order?
A Stop-Limit order is a type of pending order that combines a Stop-Loss order with a limit order. Similar to a Stop-Loss order, a Stop-Limit order triggers the placement of an order when the security price reaches a specified level. However, instead of placing a market order, it places a limit order. When using stop-limit orders, traders should be aware that the limit order may not be filled if the market moves too quickly. This can happen if the price of the security drops below the limit price before the limit order is executed.
Types of Stop-Loss Orders
There are different types of stop-loss orders, which include
- Buy-Stop Loss: A Buy-Stop Loss order is a type of Stop Loss order used for a short position. It is set above the present price when it reaches a specified price level. The order will restrict the trader’s loss if the price rises and they incur a loss.
- Sell-Stop Loss: A Sell-Stop Loss order is set below the current price when a trader holds a long position, designed to close the position if the price falls to a certain level. This is because if the asset price falls below the specified level, it signals that the market is turning against the trader’s position and could continue to fall, resulting in greater losses.
- Trailing Stop Loss: A Trailing Stop Loss order automatically follows the market price as it moves in a favorable direction. This is different from a regular stop-loss order, which remains fixed at a set price level. The trailing stop loss is not manually fixed; the platform automatically adjusts it.
Types of Stop-Limit Order
There are several types of stop-limit orders, which include;
- Buy Stop Limit order: A Buy Stop Limit order allows traders to place a limit order at a specific price (lower) once the Ask price reaches the Stop level. This is beneficial for traders who want to buy an asset only if the price reaches or exceeds a specific level but do not want to pay too much for it.
- Sell Stop Limit order: A Sell Stop Limit order allows traders to place a limit order to sell a security once the Bid price reaches a specified level, ensuring they can exit their position at a predetermined price or better. Each time the Sell Limit is established below the Bid price but above the Stop level.
Why should I use a stop-loss and stop-limit
Using Stop-Loss and Stop-Limit orders can provide numerous benefits for traders, such as risk management. By setting Stop-Loss orders, traders can limit their losses if the market moves against their position. Stop-Loss and Stop-Limit orders can help traders maintain discipline as they are clear rules for when to enter and exit positions. Stop-Loss and Stop-Limit orders can help traders avoid emotional trading decisions by automating the process of exiting a position. By setting Stop-Loss and Stop-Limit orders in advance, traders can save time and focus their energy on market analysis or developing new strategies. Knowing that Stop-Loss and Stop-Limit orders are in place can help reduce trading stress, as traders can be confident that their positions are being managed.
How to set stop-loss and stop-limit on a trading platform
Setting Stop-Loss and Stop-Limit orders can differ depending on the trading platform. Before placing a trade with a stop-loss, you must first analyze the market and determine the asset you wish to trade and the type of trade you will be opening. Once you have selected the asset you want to trade, the next step is to set the order specifications. In the Order window, you will see an option for execution type. You can choose either Instant Execution or Pending Order. After selecting the execution type, specify the price for your Stop-Loss. To set a stop limit, just like opening an order with a Stop-Loss, you will first analyze the market and select the asset you want to trade. Then, instead of choosing Instant Execution in the Order window, you should select Pending Order. After selecting the Pending Order type in the MT4 Order window, you will see a Type field with a list of pending order types. Click on the Type field. There is a menu with several options, including Buy Stop Limit and Sell Stop Limit. Choose the appropriate one for you. The order will be canceled if it is not executed by that date. If market conditions have changed, use the expiration date to prevent the order from being executed. Your order will now be placed if you click the Place button.
Conclusion
Understanding the difference between a stop loss and a stop limit order is one of the first and most important steps you can take as a new trader. Both tools are designed to protect your money, but they do it in different ways. A stop loss guarantees your order gets executed, making it ideal when you need to exit a trade quickly, no matter the price. A stop limit gives you more control over the price you sell at, but comes with the risk that your order may not fill at all if the market moves too fast.
Neither one is better than the other; the right choice depends on your trading style, your risk tolerance, and the market conditions at the time. As a beginner, a good rule of thumb is to start with stop loss orders for simplicity and security, then gradually explore stop limit orders as you become more comfortable with how markets move. The more you understand your tools, the more confident and in control you’ll feel with every trade you make.
Frequently asked questions
Can I change my Stop Loss or Stop Limit levels after placing an order?
Yes, you can typically adjust your Stop Loss and Stop Limit levels before they are triggered. However, you may incur additional fees or delays if the market is particularly volatile.
What happens if my Stop Limit order is not filled?
If your Stop Limit order is not filled, it will remain open until executed or canceled.
Do I need to use both a Stop Loss and a stop limit order for every trade?
No, you do not need to use stop-loss and stop-limit orders for every trade.
