Is the "stop limit" used as a protective stop, and what does "off-set" mean
I have a free version of NT, and I am learning how to use the Dynamic Superdom. I understanding what a buy/sell limit order is, as well as, buy/stop order. But I am confused about the stop limit, and when it is used. Is the stop limit what I use to set a protective stop? And can you explain what "off setting" is, and why it's important?
For example, say I go long at 1600 using a buy stop order, and I place my sell stop limit at 1601.50. How do I set up a protective stop at 1599? Is this the function of the stop limit? How does the off setting come into play?
A stop limit essentially enters an order into the market at a predefined price when a certain price trades. As an example you could use one to enter into a trade as follows:
Price is trading at 1600. You decide that if price trades up to 1601.00 you want to enter long. However you don't want to be left behind in case the market moves quickly and the bids move up to 1601.25 without entering you into the market. In this case you can have a predefined offset. For example an offset of 1 tick means that when you place a long stop limit at 1601.00, you are willing to pay 1601.00 or 1601.25 (if the market jumps over your ideal price),...but not higher than that.
Stop limits and stop markets are good for entries depending on your criteria. However most people will advise against using stop limits to get out of trades. This is once again because of fast moving markets. If you are long with a protective stop limit under the market at 1599 and an offset of 1 tick, you are only protected down to 1598.75. If the market moves quickly past that point (perhaps on news, the liquidity at a certain bid/ask level disappears and the inside bid/ask moves to another level), you will be stuck in the trade with the price trading far below where you wanted to exit. Losses growing fast and you're still stuck in the trade.
For stop losses, go for stop markets.
Hope that helps.
You don’t trade the markets; you only trade your beliefs about the markets.
- Van K Tharp
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