Stop and Stop limit orders


Experienced member
Stop loss orders are some of the best techniques available to investors. But make sure you know the difference between a STOP and STOP LIMIT order.

When you already have a position, you can place a "stop loss" order. These are standing instructions, with a time line, which direct your broker to sell your stock under certain conditions. Generally, stop loss orders are used to either protect a profit, or to prevent a loss.

Two Kinds
There are two kinds of stop loss orders: STOP or a STOP LIMIT order. Both are designed to sell your stock "automatically" when certain events occur. However, it is important to understand the difference between the two, because the circumstances under which the order is executed is different. To get the results that you want, make sure you place the right type of order.

Note: Most brokerages use the terms STOP and STOP LIMIT, as described below. However, you may wish to confirm the meaning of a Stop loss order if your brokerage uses terms other than those described here.

STOP Orders
A SELL STOP order is used to protect a long position.

A SELL STOP Order is an order to SELL below the current market price, but only when the market trades below your specified STOP price. The market must actually trade below your specified price for your order to become effective.

When the stock trades below your STOP price, your SELL STOP order immediately becomes a SELL AT MARKET order. It will most likely be executed quickly after the market trades below your STOP price.

It is important to note that because a STOP SELL order becomes a market order, your executed price may not be close to your STOP price.

For example, a SELL STOP order for 100 Shares of XYZ for $22 does not guarantee that your stock will be sold around or even close to $22. If bad news comes out overnight, and XYZ opens at $15, below your STOP of $22, your SELL may occur at $15 or even $14. However, your order was executed. If the stock continues to fall to $10, you may be gratified that you got out when you could.

By contrast, however, in situations where a stock price drifts lower, rather than collapses, the SELL STOP order generally trades close to the specified STOP price.

A BUY STOP order is effectively the same, but for an initial short position.

A STOP LIMIT SELL order is similar to a SELL STOP order, however, the specified LIMIT price is the only price that you will accept for the trade. As soon as the ASK price hits your specified STOP price, your trade becomes a SELL at LIMIT order. This does not guarantee that your order will be filled. There must be another party who fills your order.

In a rapidly falling market, your order may never be filled with a STOP LIMIT SELL order. If other SELL orders at lower prices start to appear, your order will be left behind, unexecuted at the higher price.

For example, in the example above, if XYZ opens at $15, from a close of $30 the day before, your STOP LIMIT SELL order at $22 will never get executed. This may be what you want, but if the stock continues to drop to $10, you may wish you had a STOP SELL order at $22, and been "stopped out" at $15.

A STOP LIMIT BUY is the same type of order for an initial short position.

Which To Choose?
The SELL STOP order makes it more likely that your order will be filled. The risk you take is that a rapidly falling market will sell your shares lower than you expected. However, you can always reenter the stock at lower prices after your SELL STOP order. Choose the SELL STOP when you truly want to make sure your order is filled, and you are fairly certain that any decline will be orderly.

The STOP LIMIT SELL order specifies the minimum price you will receive, if your order is filled. Your order will not be filled unless the market begins to trade right at the price you specify. Since all stocks fluctuate to some degree, you probably should not set a STOP LIMIT SELL order too close to the current price, if you are trying to protect profits.

The risk you take with a STOP LIMIT SELL is that the market moves right past your limit price, and you are left holding stocks when the price is well below where you wanted out. Choose the STOP LIMIT SELL if you want to avoid feeling cheated in a rapid decline, and would rather guarantee the price when, and if, your order is filled.

With most brokerages, both SELL STOP orders and STOP LIMIT SELL orders can be placed as either day orders, or good until cancelled orders.

Final Word
Stop loss orders are useful, but they don't eliminate all risk. You can either make sure your stop order is filled, (STOP LOSS) or you can make sure you get the price you want (STOP LIMIT), but you can't get both.
Also ...

Spread bet co's provide whats called the controlled risk bet or CRB.

These are a particular type of bet that guarantees to exit your position what ever happens at the exit price you set.

So if you longed Moni at 2.80 with a CRB stop at 2.20, when it collapsed over night to ~1.20 you would be out at your stop.

Normally the CRB stop has to be placed at least 10% off the stock price (or a set number of points off the index price).

You pay for it with a higher spread typically 0.5% extra.

Finspreads dont let you set CRB's on techs, CMC will do.

Cheers Robin
And while I remmeber

For CFD's the saxobank cfd service also offers a similar function, as far as I know UK cfd co's like CMC do not offer this.

Also note the difference in how your money is protected between a CFD account and a spread bet account (the spread bet money is ring fenced up to ~50k in the event of the company going bust).

Robin - thanks for explaining STOPS with such clarity. Is it possible to mix the orders? By this, to give an example, I mean can you set a SELL STOP at (say) $20 with a LIMIT of $18? This would hopefully get you out at or close to $20 whilst giving the market room to breathe. You would feel pretty sick if having set a SELL STOP of $20, you failed to get out at $19.9 when it was available, and before it tanked to $10.

Roger,I'm afraid you cant do what you suggested.Some new people to the Nasdaq need to know exactly what the stops do so they are not caught unaware if the market goes against them.

Believe it or not if i'm baby sitting a position i always put in a quick stop if i go to the toilet.For this i always set a normal stop(ie a market order) However it pays to know the stock your in and this is fine if it is a liquid stock with lots of players at each level (another reason for viewing a level 2 screen).Then i know if the stock tanks when i'm out of the room i'll get a decent fill.However if the stock has weak hands and big gaps between the levels i'd be worried about where i might get filled.

I enjoy looking for consolidations or stocks set to run and putting buy limit stops just above the action.If they run to fast i dont want to get filled by a market order but if i do manage to get my limit filled i've got a good entry point.I'll then switch in and manage the position.

I did this with PRSF yesterday which i've followed for six months and know it well.My buy stop got hit at $1.60 just above the consolidation and i ran it to the obvious level of $2 for a nice 25% gain.You can imagine my suprise when it ran on nearly same distance again.It ran up over 50% on the day.

For fundamentalists.Its got $155 million to get thru the recession,so i didnt think it was going bust. I've had it on my watch list for such a long time. At 80c 3 weeks ago i just didnt think it could go much lower but it was still in a down trend.Now its up 300% in three weeks !!!!
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... and of course thx to Naz

Whoops! - must read the thread author more carefully.
.. and every answer spawns at least 5 new questions!

Naz - interested in your use of BUY STOP LIMIT orders. Do you place these as "good until filled", or do you set an expiry date on them when you place them? Or do they automatically expire at the end of the day? Also, having placed a BUY STOP LIMIT order, do you at the same time place a SELL STOP order which is contingent on the BUY STOP LIMIT order having been filled first? The thinking here is that if you are filled with a long position when you are away from the screen, you have some protection if it immediately goes against you.

In the event that BUY STOP LIMIT orders are good until filled I could imagine a situation where a sudden run up of the Nasdaq could trigger all your buy stops and leaving you with a tremendous margin call from your broker if not careful. Or is this a situation you just have to manage?

Roger-Any of those buy orders i just leave in for the day.At the end of the day everything is cancelled i sell out of everything into cash because i dont like uncertainty hitting any overnight positions.Now and again i'll hold 1 position over to take advantage of a gap on the open the next morning.

On most software you have to buy the stock first before you can put in a sell stop.However there is so much proprietry software around that nothing would suprise me.I always liked an order they had at CMC in the UK which was an oco order (one cancels the other) you bought the stock, put in a target sell price and a stop at the same time then when one was hit it cancelled the other.

In any instance that you leave orders in the market to buy stock you must have a plan and part of that plan must cover unforeseen cicumstances.With daily 4/1 margin you realy shouldnt get into a position where you could buy to much stock.

It all comes down to this you are totaly responsible for your actions and you must have a plan to cover everything because one day the unforeseen will happen believe me,I've had it myself and i've seen other traders have it happen to them.It costs you thousands and it hurts.However you learn from it and you make sure it never happens again.

The worst i saw was a stock collapse and a trader not take his stop,the stock went into freefall and he was unable to get out(because he hadnt learnt his level 2 properly and didnt know how to hit the lower levels where no one was trading) The Nasdaq pulled the stock and stopped trading in it.They didn't allow any more trading that day.When the stock opened the next day it gapped down another 50% on the open and continued to sell off.Do you see why a plan and discipline are so important.

My biggest mistake cost me about $4000 in about 10 minutes.It was rather a complicated thing to happen but i've never forgotten how i should have handled it and i changed my proceedures to take into account it ever happening again.
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Great posts you guys. Here's a tip to help the less experienced avoid some monster "traps".
1: write down your trades :1L, 1S; 1L,2S,1L;
Make sure your "net position" is ZERO!
2:Having played "smart" and entered your stop loss or buy limit ( or whatever), NEVER EVER forget it!!! You may have placed it (as naz CORRECTLY suggets) whilst a visit to the loo is undertaken.Then you suddenly find there's a run in your direction and you close off for a handsome profit. UNFORTUNATELY you forgot to cancel your "stop" trade.......and guess what? an hour later it gets executed just at a time when the stock is tanking...and guess what else? It was a bottom and now the stock is flying again...except you are SHORT!

Not a nice position to be in, so a "post it note" just to remind you on the screen will avoid that.
Lastly, if you trade CMC ( and maybe others) you can get a list of " NET POSITIONS, TRADES FOR THE DAY and PENDING ORDERS ( stop positions). It is good practice to check these from time to time for peace of mind. Being 1 long or 1 short NET overnight could cost you a dearly.
Wise words chartman. A true story now which will blow any vestiges of credibility I may still have clean out of the water.

My first venture into trading the FTSE100 future was a couple of years ago. I can't remember the precise levels, but they were something like this.

I went long at 6350 and placed a sell stop at 6340. The future rose and then immediately started to retreat. At breakeven I picked up the phone to my broker (no online facility then) and by the time it was answered the ftse was at 6342. I got filled at 6338. I then instructed the broker to cancel all stops. He confirmed that all stops were cancelled.

I did a couple more trades, and then after the market closed I phoned to confirm that I "had no positions open". The broker checked my account and said that I had "no positions working". Fine. Well, no actually.

I didn't trade again for about 2 weeks, and then had a week at home during which I did about 15 trades, which on the face of it were mainly profitable. Hey! I'm getting the hang of this!

The statements piled up and one evening I sat down to sort through them. They really didn't seem to make sense, and the bottom line was about £600 in my favour more than I had reckoned. So the following day I phoned the broker to clarify it, and he said that I had one FTSE 100 future open! Yet I hadn't traded for about 3 weeks!

You are probably ahead of me, but what had happened was that on the first day of trading, my instructed sale went thru below my stop which had therefore been triggered. Therefore I had bought one and sold 2, so the net position was that I was short one contract. When I asked for confirmation that all stops were cancelled and I was told that there were no more stops in place, this was true, because my stop had been filled and therefore was not outstanding. And when I phoned to ask whether I had any position open and was told that there were "no positions working", this was also true, because I didn't appreciate then that this refers to unfilled positions rather than filled ones. He had answered a question I hadn't asked and I didn't understand his answer!

So for about 6 weeks I was permanently in the market, except for the few occasions when I thought I was opening a postion, but which in fact was closing the one that was already open, and had been for days! I then sat sweating profusely until with a great sigh of relief I closed out, but which was in fact opening a new position which was then left in place for days!

The net result when I discovered the error was that I had made £600, but I break into a sweat everytime I think what may have happened.

1. Check your statements immediately.
2. Get absolute confirmation that your position is "flat" i.e no positions open. If terms you don't understand are used, ask again and again until there is unambiguous confirmation that your position is as you believe it to be.
3. If you intend to close a lossmaking position yourself, don't set your stop too close.
4. Always balance the number of long and short positions, and at the end of a busy trading period, double check after you have finsihed for the day, either online or by a phone call, that your position is as you believe it to be.

I am now going to go away and hide my embarrasment!!! :eek:)

Further to my post on "positions" I had a bad experience last night.....about 8:50, I had a quick check on my "net positions" and CMC returned a list saying 1 long on DOW. This was strange I thought because I had calculated I was NEUTRAL....oh well never mind I'll just close this long and that'll be that.A further check this morning shows I am 1 short on DOW!!! So I have gone short overnight on the DOW..very distressing. There must be a significant time lag on updating "net positions", causing me to do an extra trade, when in fact I was neutral.
Let's hope the DOW falls on the open as it has the last few days, then I'll have escaped :(