What Are the Difference Between Stop Loss and Stop Limit Order
Stop order and limit order both are instructions that execute trades automatically when the market price hits a predefined level. These two types of orders allow trader to set the specified price level for automatic execution without having to monitor the market constantly.
A stop order is often called a stop-loss order. The purpose of stop order is used to limit losses, while the limit order means an instruction to trade a certain amount of asset at a specified price or beyond.
How Limit Order Work
Investor use limit order to set a limit price in which the order will be executed automatically at the limit price or better. For example, John long a position with a limit order at $30. This mean the order will be executed automatically as soon as the price reaches $30 or lower. John can only place such a limit order when the price is trading above $30.
If John want to short the position, a limit order at $30 mean John can only place such order when the price is trading at lower than $30. The limit order will be executed automatically when the price reaches $30 or more.
How Stop Order Work
The aim of stop order is used to limit losses, in which a stop order will be executed, if the market price gets “worse” than the specified price (stop price). For example, if John placed a sell short stop order at $30 when the price is trading at $34, it means the order will be executed automatically if the price hit $30 (limit price). However, John worry that the price might fall and lead to a loss. Therefore, he set a stop price at $20, which mean if the price dips to $20, then the order will be executed.
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