Trading Risk Management: Stop Loss vs Stop Limit

For both investors and swing traders, it’s vital the difference between stop loss vs stop limit orders is understood. They’re both order types that form a critical part of our trading risk management.

What’s the Difference Between a Stop Loss vs Stop Limit Order?

A stop-loss, or stop order, is an instruction to a broker, placed on entry to a trade. The order will be to buy or sell a position at a particular price. Placing a stop-limit order, by contrast, means that an order is triggered only if the stop price is met and which if happens, will execute a limit order.

What are the Advantages and Disadvantages of Stop Loss Orders?

The principal advantage of using stop-loss orders is that they compel us to determine our maximum loss and exit position before we even enter a trade. “Set and forget” swing traders, or day traders who need to be away from their screens for periods during the day, also get some reassurance that their positions will be protected against sudden, dramatic price moves in their absence.

What are the Advantages and Disadvantages of Stop Limit Orders?

In contrast, the advantage of stop-limit orders is that they guarantee that we need only exit a trade at our specified price or better. The problem is that in rapidly moving markets it may not be possible for orders to be filled immediately at the specified price.

When to Use a “Mental” Stop Loss or Stop Limit

For these reasons, there are traders, both professional and amateur, who are reluctant to place stop-loss or stop-limit orders at the time they enter a trade. They prefer to use a so-called mental stop-loss, which simply means that they will keep in their heads the price at which they will exit a losing trade.

What are Trailing Stops and How to Use them?

With this technique, we will set our stop at a percentage or dollar figure above or below the market price. The stop will therefore move in line with changes in price and will lock in profits for as long as the trade continues to move in a profitable direction.

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