• Stop loss vs Stop limit has become a key topic that every trader should understand before stepping into the volatile world of the forex exchange market. If you are just starting out, or are trading on a regular basis, using the types of orders in your trading platform can greatly impact your profitability and exposure to risk. Among these, the stop loss limit order is one of the most misunderstood concepts and is usually confused with the stop loss order. This blog will guide you about the differences between stop loss vs stop limit and help you choose the right strategy suitable for your trading goals.  

What is a stop-loss order? 

• A stop-loss order refers to an instruction provided to a broker to automatically purchase or sell a security when its price reaches a certain level, called the stop price. The main purpose of a stop-loss order is to limit the potential loss of a trader on a position or to lock in profits if the market is moving in an unfavorable manner. For instance, if you purchase a stock at $100 and want to stop your loss at $95, you can place a stop-loss order in order to sell the stock if the price drops to $95. When the market price hits $95, the stop-loss order is activated and becomes a market order, selling the stock at the next available price. This mechanism also helps investors to manage risk by automating the exit from a position without any need for constant market monitoring.  

• As per Trendo Forex Broker, conservative traders usually risk less than 1% of their total capital, while aggressive traders may usually risk up to 10% per trade.  

Pros of a stop loss order  

Automatic loss limitation 

• Stop loss orders automatically sell a security if the price falls to a predetermined level, which helps investors to limit potential loss without constantly monitoring the market.  

Saving time 

• Investors do not have to monitor the market continuously; stop-loss orders work automatically, and offer peace of mind and convenience to traders. It also relieves them from the tension of monitoring the price throughout the day.  

Emotional discipline 

• By predefining exit points, stop-loss orders remove the emotional decision-making from forex trading. This helps investors to stick to their strategy and also avoid any impulsive reactions driven by fear or greed.  

Cons of a stop loss order 

Triggered by short-term fluctuations  

• Stop-loss orders are activated by small and temporary price dips or market volatility, which causes a sale even if the price quickly rebounds, resulting in unnecessary losses and missed gains.  

Market crash and gap risks 

• In sharp downturns or after-hours trading, prices can gap below the stop price, which leads to execution at a major lower price than intended. 

Execution prices are not guaranteed 

• Once activated, stop-loss orders become market orders; this implies the actual execution price is worse than the stop price, especially during times of rapid market movements or gaps. This phenomenon is usually known as slippage, which leads to larger-than-expected losses.  

What does a stop limit order mean 

• A stop limit order refers to a type of trading order that is a combination of the features of a stop-loss order and a limit order to give investors more control over the execution price of their trades. It consists of specifying two prices: 

• Stop price- The trigger price at which the order gets activated.  

• Limit price- The maximum for a purchase order and minimum for a sell order price at which you’re willing to participate in the trade.  

• When the price of the market reaches the stop price, the stop-limit order changes into a limit order. Trade will only be executed at the limit price or better, not at any price available in the market. This assists investors in avoiding any unfavorable price dips during the unsure and fast-moving markets, but it also implies that the order will not be filled if the market price is moving past the limit price too quickly. Stop-limit orders are also used to manage risk, limit losses, and lock in profits while making sure that trades only move ahead at acceptable price levels.  

Main differences between Stop loss vs Stop limit orders 

Order trigger 

• Stop loss order becomes a market order when the stop price is attained, whereas a stop-limit order becomes a limit order when the stop price is reached.  

Price control 

• Stop-loss order guarantees execution, but not the price, whereas stop-limit orders guarantee the price but not the execution.  

Use case 

• Stop-loss order is for traders wanting to ensure a trade is executed to limit losses. A stop-limit order is for investors wanting to take control over the minimum or maximum price.  

Execution guarantee 

• Stop-loss order guarantees execution but not the price. While a stop-limit order guarantees a price limit, but also not the execution.  

• Stop loss order focuses on execution. When the stop price is hit, the order then becomes a market order and is executed at the next available price, which is lower or higher than the stop price in the rapidly moving markets. While stop limit orders focus on price, when the stop price is hit, the order then becomes a limit order, which will only move ahead at the specified limit price or better. This means that they may not be executed at all if the price moves past the limit before the order is placed.  

When to use stop loss vs stop limit  

Stop-loss order  

• This is used when your primary goal is to make sure that your position is exited if the price is moving against you, regardless of the exact price at the execution. It is best for high liquid stocks or when you want to limit losses rapidly in the fast-moving markets. Stop-loss order is suitable for protecting against the large and unexpected losses or for locking in the profits without examining the market on a regular basis. It is best used when execution is more significant than getting a certain price.  

Stop-limit order 

• It is used when you want to check the minimum and maximum price at which the order is executed. Stop-limit order is best when you are concerned about slippage and want to risk the order not being filled. It is best in less volatile and less liquid markets when you have a strong preference regarding a specific price range.  

Conclusion 

• Selecting between stop loss vs stop limit is not about which is better instead, it is about which of these two is effectively aligned with your trading objectives, market conditions, and risk tolerance. Both of these order types are significant tools that, when used correctly, can save you from major losses and help you in making smart decisions. If you are searching for expert guidance on incorporating these strategies in real-world trading, Thaurus is a powerful platform that you can explore. The platform provides expert insights about algorithmic trading and risk management strategies. If you are starting out or are an experienced trader, Thaurus will help you in making informed decisions by combining smart tools with the present forex market.  

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