• Stop Loss vs Stop Limit: Orders Explained

  • Even though some people think that it’s not a lot of difference between a stop loss vs a stop limit order there really is and sometimes it can make a big difference on how much you make or lose on the trade.

  • When to Use Stop Loss Orders

    Every trader knows that they should use a stop loss order on every trade they make. This of course can help limit your losses in case of major moves in the markets; as an example when the USDA Crop Reports come out. I include all of the major crop reports on my calendar so check it out when you have time. Click HERE for access to my Calendars when you finish learning about stop loss vs stop limit orders.

    Here is the difference: A stop-loss order becomes a market order when the price hits it. Hold on David, what does that mean exactly? Glad you ask. 

    Let’s say that you are short Gold thinking the price is going down and you got short at 1170 and put a protective stop in at 1180 which is a $1,000 risk. But what happens if Gold opens the next day (trading session) at 1190? With your stop at 1180 as soon as the price was at 1180.00 or more your order became a market order and you would have been stopped out “at market” at 1190.00, not 1180.00. This is what people refer to when the say the market gapped on the open. So what you thought was a $1,000 protective stop just became a $2,000 loss. This is because the market “gapped up on the open”. It happens to all of us at times. 

    But what happens if the market opened at 1190.00 and then dropped back down during the day to 1180.00 where you had your protective stop? Well you would have been stopped out at 1190.00 on the open using a stop order. Like I said, a stop order becomes a market order as soon as price reaches it or in this case goes past because the market opened above your stop. A market order just means that it takes you out of the trade “at market” wherever the price is at the moment.

  • When to Use Stop Limit Orders

    A stop limit order on the other hand means that your order must to be filled at the price you set it at or better. It doesn’t become a market order because you ONLY get it or out at a specific price. This is a catch 22 and can work for or against you. 

    In the above example if your 1180.00 stop had been a limit stop order then you would not have been filled at 1190.00 with a $2,000.00 loss. Instead you would have been filled at 1180.00 when the market came back down and hit 1180.00 and would have only lost $1,000.00.

    Here is the “catch”. With a limit order if the market opened at 1190.00 and kept going up, you would still be in the trade. Read that again! Because your stop limit order was an order that said I want out at 1180.00 ONLY. So if the price did not come back down to 1180.00 you are still short the market. Has it ever happened to me? Yes, and it can be painful to say the least.

  • Is a Stop Loss or Stop Limit Order Best?

    When I first started trading back in the 90’s there were a lot more “gaps” than there are today. A gap is when the market opens a lot higher or lower than it closed in the previous session. The reason there are not as many gaps today is because of two factors; many markets trade almost 24 hours a day and there are more people trading which makes the markets more liquid.

    Which is better; a stop loss or a stop limit order? I think that in fast moving markets a stop order is the better choice because a fast moving market can gap up or gap down quickly based on some news event or report. I almost never use a stop limit order anymore because I’ve been “bitten” more than once using them.

  • Don't Confuse a Stop Order with a Market if Touched Order

    Now there is another type of order that is similar to a stop order; it’s called a MIT or Market if Touched order. What’s the difference? Let’s say that you are bullish Gold and it’s trading at 1110.00 but you only want to buy it if it comes down to 1000.00. In other words, you want to be long Gold at 1000.00. Then you would place an MIT order at 1000.00 and if price came down and touched 1000.00 and shot back up you would be long from 1000.00.

    You might be thinking that an MIT and a stop order are the same thing. Close, but not exactly. An MIT order becomes a market order if the prices even touches it. In a perfect world a stop order means that the price must go past your stop price by a tick or more.

    But I’ve had orders that had a stop at a specific price and the market touched that price and then did not trade through it and I was still stopped out.

    I think MIT orders have a place though. Let say that Gold is trading a 1120.00 today and you want to BUY Gold if it comes down to 1110.00. In that case you could use an 1110.00 MIT order and would be long Gold if price ever came down and “touched” 1110.00.

  • Please Leave a Comment Below for Questions on Stop Orders

    I'm always happy to help answer questions on each of my covered topics. If you have any thoughts or questions on stop orders such as how they work, or when to use them, please let me know in the comment section below.