A stop-limit order is a conditional order that combines a trigger with a price restriction. It carries two prices. The stop price is the level at which the order becomes active. The limit price is the least favourable price the trader will accept once it is active. Until the market reaches the stop price the order is dormant; after that it behaves as an ordinary limit order.
The order type is offered by most brokers and trading venues for shares, futures, currencies and crypto assets. It is an alternative to the plain stop order, which turns into a market order when triggered. The stop-limit version gives control over price in exchange for giving up certainty of execution.
How the order works
A sell stop-limit order is placed with the stop price below the current market. It is typically used to protect a holding or to close a long position if the price falls. The limit price is set at or below the stop price, and the gap between the two is the room allowed for the order to be filled after it triggers.
A buy stop-limit order is placed with the stop price above the current market and the limit price at or above the stop. It is used to cover a short position if the price rises, or to enter a position when the price moves up through a chosen level, as in breakout trading.
What counts as reaching the stop price depends on the venue or broker. The trigger may be the last traded price, the bid price or the ask price, and the choice affects how easily the order is set off by a brief or thinly traded move.
Worked example
An investor holds a share trading at $50 and enters a sell stop-limit order with a stop price of $45 and a limit price of $44.50.
- Orderly decline. The price drifts down and trades at $45. The order activates as a limit order to sell at $44.50 or better. Buyers are present at $44.90, and the order is filled there.
- Gap down. The company reports bad news overnight and the share opens at $40. The stop is triggered because the price is below $45, but the limit of $44.50 is above the market, so no buyer will pay it. The order rests unfilled, and the investor still holds the share at $40.
In the second case a stop-loss order of the market type would have sold at about $40. The stop-limit order avoided selling at that price, but it also failed to provide the exit the investor wanted. If the price continues to fall, the loss grows.
Comparison with a stop market order
The two order types fail in opposite ways. A stop order that becomes a market order will almost always execute, but in a fast market it may do so far from the stop price, an effect called slippage. A stop-limit order cannot execute beyond its limit, but it may not execute at all.
The danger of stop market orders was shown during the flash crash of 6 May 2010 and again on 24 August 2015, when prices of many United States shares and exchange-traded funds plunged briefly at the open. Stop orders were triggered and executed at prices far below their stop levels, shortly before prices recovered. After these episodes regulators and exchanges drew attention to the risks, and the New York Stock Exchange stopped accepting stop orders directly in 2016. Brokers continue to offer both types and manage them on their own systems.
Choosing the stop and limit prices
Setting the two prices involves trade-offs. A stop placed close to the current price is likely to be triggered by ordinary fluctuation, while one placed far away allows a larger loss before acting. A narrow gap between stop and limit gives tight price control but a high chance of being left unfilled in a quick move. A wide gap raises the chance of execution but accepts a worse price. Traders often relate these distances to the instrument's recent volatility and to its liquidity.
The order also needs a time condition. A day order lapses at the close, and a good-till-cancelled order stays in place until executed or withdrawn. Many brokers trigger stop orders only during regular trading hours, so a move in an extended session may not activate them. A stop-limit order can form the protective leg of a bracket order.
Risks and limitations
- Non-execution. The order offers no protection when the market gaps through both prices or when trading is halted and resumes at a different level.
- Partial fills. Only part of the quantity may trade at the limit, leaving a residual position.
- Triggering on noise. A brief spike or a single odd trade can activate the order, after which the price returns to its earlier level.
- Visibility. Stop levels tend to cluster at round numbers and recent lows, and some market participants are thought to trade in anticipation of them.
A stop-limit order is a tool for managing execution risk, not a guarantee against loss.