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Mastering the Order Types: Stop-Limit Orders

Mastering the Order Types: Stop-Limit Orders

Learn how incorporating stop-limit orders into your everyday trading can better help you reach your trading objectives.

Using a stop-limit order is one way for a trader to gain better control of their order. Understanding what order types are, why and when traders use them, and what factors impact their execution can help you match an order type to your specific trade objectives.

Stop-limit order

A stop-limit order triggers the submission of a limit order, once the stock reaches, or breaks through, a specified stop price.

A stop-limit order consists of two prices: the stop price and the limit price. The stop price is the price that activates the limit order and is based on the last trade price. The limit price is the price constraint required to execute the order, once triggered.

Just as with limit orders, there is no guarantee that a stop-limit order, once triggered, will result in an order execution. This is an important point that is worth repeating. A stop-limit order doesn’t guarantee that any trade will occur.

When to use stop-limit orders

When you submit a stop-limit order, it is sent to the exchange and placed on the order book, where it remains until the stop triggers or expires or you cancel it.

Stop-limit orders will only trigger during the standard market session, 9:30 a.m. to 4:00 p.m. Eastern time. Stop-limit orders won’t trigger or execute during the extended-hours sessions, such as the pre-market or after-hours sessions, or when the security is not trading, such as during stock halts or on weekends or market holidays.

You can decide how long your stop-limit will be effective—for the current market session only or for future market sessions as well. Stop-limit orders that have been designated as day orders will expire at the end of the current market session if they haven’t been triggered. But good-till-canceled (GTC) stop-limit orders will carry over to future standard sessions if they haven’t been triggered. At Schwab, GTC orders remain in force for up to 60 calendar days unless canceled.

Why traders use stop-limit orders

If you’re not able to monitor your portfolio closely, the stop feature can help you stay on top of market developments by automatically triggering an order if and when the stock reaches a specified price. For example, say that you identify a specific pattern and decide that a move above or below the current price would present a trading opportunity. You could use that information to set the trigger or stop.

Buy stop-limit – Buy stop-limit orders can help traders control the price they pay once they’ve established the maximum per-share price that’s acceptable. If the price increases to, or up through, the stop price, that will trigger an order to buy.  

A buy stop-limit order involves two prices: the stop price, which activates the limit order to buy, and the limit price, which specifies the highest price you are willing to pay for each share.

By placing a buy stop-limit order, you are telling the market maker to buy shares if the trade price reaches or exceeds your stop price¬—but only if you can pay a certain dollar amount or less per share.

Sell stop-limit – A sell stop-limit represents a limit order to sell if the security’s price falls down to, or down through, the stop price. 

A sell stop-limit order involves two prices: the stop price, which activates the limit order to sell, and the limit price, which specifies the lowest price per share you are willing to accept from a buyer. 

By placing a sell stop-limit order, you are telling the market maker to sell your shares if the price decreases to your stop price or below—but only if you can earn a certain dollar amount or more per share. However, since there’s a chance that the limit order to sell might not get executed, many traders don’t consider a stop-limit order to be an effective way to manage risk on the sell side.

When you enter a sell stop-limit order, make sure that both the stop price and the limit price are below the current bid price; otherwise, the order could trigger immediately.

Stop-limit order risks

Stop-limit orders offer many advantages, but in exchange for having control over the price you’re paying or accepting, you’ll face some tradeoffs. Understanding the many factors that affect how or whether a stop-limit order is executed can help you determine which risks you want to take.

No execution – Stop-limit orders allow you to achieve a certain price or better. But they don’t guarantee that an execution will occur because the price may never meet or beat your limit price. Even if trading activity brings the price up to the limit order price for a short time, an execution still might not occur if other orders ahead of yours use up all or part of the shares available at the current price.

Partial fills – There’s also the risk of a “partial fill,” or an execution of some of the shares in your order but not all of them, which leaves the unfilled shares as an open order.

This is an important point in planning for commission costs, particularly with GTC orders. Multiple fills on a single order within a single trading day only involve one commission since all of the fills occur on the same day. However, executing parts of a single order across multiple days involves a commission for each trading day in which an execution actually occurs. If an order executes over four days, you’ll pay four separate commissions.

You can lower the risk of partial executions by specifying certain conditions in your limit order. “All or none,” “fill or kill,” “immediate or cancel,” and “minimum quantity” are all special conditions that can refine your order to suit your trading strategy. Keep in mind, though, that special conditions can further reduce the chance of your order being executed.

What’s next?

A stop-limit order automatically triggers a limit order if and when the stock’s price reaches a specified amount. If your trading priority is a guaranteed price, then this can be a useful tool. Understand the risks, and explore how you might deploy stop-limits to support your trading goals. 

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