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Limit vs stop vs stop-limit orders
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Limit vs stop vs stop-limit orders

  #1 (permalink)
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Limit vs stop vs stop-limit orders

Can someone help me to understand when to place limit, stop, stop-limit orders?

I understand the definition of these order types, but I'm not sure when to use them, which one is more profitable? more risky?


Is it fair to compare them against each other and how to compare them?


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Trading Order Types - Description of Market, Limit, Stop, and Other Trading Order Types

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I believe it is fair to think of your orders first as being active or dormant orders, and then as being market or limit orders.

An active order, as the name implies is awake and waiting to execute.
This is the normal state of an order, it is sitting there at the exchange and waiting to be filled as soon as possible.

Now, you decide how you want that fill to occur: do you want a specific price and you don't accept other? then you select a limit order and chose a very precise price.

But what if you don't really care, and you just want to buy or sell immediately as you press the button? then you select a market order and you're done, the exchange will fill you at the best available price no matter what that price is.
Surprises can often occur, you could be filled way outside the latest range of prices you are observing... and it is quite always to your disadvantage.

Note that if current price is let's say 100$ and you want to buy only when the price reaches 150$ you cannot do so with a classical limit order at 150$ as discussed above.
As soon as you hit the button, the exchange receives your order, sees that the current price is at 100$ and say heck I can fill him at a better price than his request, this surely is to his advantage so let's do it
And you will see an immediate buy at 100$ or perhaps 101$ or something like this. But WAY LOWER than your desired buy price!

So what to do if you absolutely and only want to buy when the price reaches 150$? What if your strategy tells you that the price will only go higher if it reaches the 150$ level, otherwise it is not good to own the stock?

Here comes the role of dormant sleeping orders... You have to send it to the exchange because you need to go out and can't spend all day watching your screen waiting for the price to reach that 150$ level; but at the same time you want to tell the exchange hey listen boy, this order is not active it is sleeping and please don't wake it up unless I tell you so! ok?!

So how do you tell the exchange when to wake up that order and make it ready to execute?
By using a stop price

The stop price is the price (if hit) that will wake up your dormant order and activate it; and there is no way back. Once that order is awake you can't make it sleep again, it will either execute if the conditions are present to its execution or you cancel your order before execution.

But hey, if that order wakes up, how will it fill? on what basis? what price?
If you use a stop market, then it will execute as a market order when it wakes up, thus at any available price as described previously.
If you use a stop limit, then it will execute as a limit order when it wakes up at exactly the price you have selected as the limit.

For illustration, let's say that if price hit the 150$ level there is potential it continues higher and you want to take advantage of that of course to make some profit. But at the same time, you say hey I don't want to buy it at 150$ but perhaps at $145 only after it hits 150$ first.

So what you do is place a buy stop limit order with a stop price of 150$ and a limit price of 145$.

When the price reaches 150$ the order activates at the exchange without you doing anything, and it will become a buy limit order at 145$ which is naturally lower than the latest price at 150$. This is the same as if you waited all day watching the price reach 150$ and as soon as it reaches the level you send a classical buy limit order for 145$ and wait for it to be filled.

If you are using the stop to protect a position, I would prefer to use the stop market or simply a stop order so that in the case the trade turns sour on you and hits your stop, you exit immediately!
If you use a stop limit, in case of crashes especially, the price can go down on you, hit the stop and activates your limit order, but also continues to go down without ever filling you at your desired limit!

If you are using the stop to enter or initiate a trade, I would prefer to use the stop limit so that I control the exact price at which I take the trade.

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Thanks for the example you mentioned but just to clarify:

In your example, you mentioned current price at $100 and then all buy orders (limit, stop, stop-limit) above the current price. Is that correct?

If so, why on Ninja Trader you can only place buy stop and buy stop-limit above current price?

You can place sell limit order above the current price but you cannot place buy limit above current price.


Also on Ninja Trader you can place buy limit, sell stop, sell stop-limit below the current price.

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ghl123 View Post
Thanks for the example you mentioned but just to clarify:

In your example, you mentioned current price at $100 and then all buy orders (limit, stop, stop-limit) above the current price. Is that correct?

If so, why on Ninja Trader you can only place buy stop and buy stop-limit above current price?

You can place sell limit order above the current price but you cannot place buy limit above current price.


Also on Ninja Trader you can place buy limit, sell stop, sell stop-limit below the current price.


In my example I mentioned all buy orders above 100$ for the sake of the example of course and in its complete context
It is possible, especially if you enter the order automatically with your broker on his platform/website, to transmit a buy order at a limit price higher than last price -> it will be filled automatically as if it were a market order.

NinjaTrader kind of protects you from the possibility to transmit a buy limit order higher than current price, or a sell limit order lower than current price. For this, a buy/sell market would give the same result, so no need for the redundancy on the platform.

Either case, this is definitely not something any trader would ever do
Why buy higher when you can buy lower? and vice-versa...

So to absolutely buy at a higher price than last price you need to explicitly have a dormant order and get it activated via a stop price by transmitting a stop or stop limit order.
Similarly, to sell at a lower price than last price you need to have again a dormant order and get it activated via a stop price.

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Thanks @Fadi, just out of interest, which order type would you (traders) choose? Stop or limit orders? And why?

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ghl123 View Post
Thanks @Fadi, just out of interest, which order type would you (traders) choose? Stop or limit orders? And why?

I donít know about other traders but here is how I place orders;

To exit a trade because I hit my stop I use a stop order. I donít use a stop limit in this case because if the trade is going against me I may not get filled at the limit price.

To enter a trade on a breakout I use a stop limit. Usually placing the limit price a bit higher than the stop price for a long trade. With a stop order you might get filled much higher than you expected.

To enter on a pull back to a MA or a trend line etc, I will use a limit order. If the price get to the point I want to enter I get filled.

I also attach a stop order to every entry I make. This puts the order on the brokerís server so that if I lose Internet connection my order will be executed if the trade goes against me.

This doesnít work for everyone but works for my trading.

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deaddog View Post
I donít know about other traders but here is how I place orders;

To exit a trade because I hit my stop I use a stop order. I donít use a stop limit in this case because if the trade is going against me I may not get filled at the limit price.

To enter a trade on a breakout I use a stop limit. Usually placing the limit price a bit higher than the stop price for a long trade. With a stop order you might get filled much higher than you expected.

To enter on a pull back to a MA or a trend line etc, I will use a limit order. If the price get to the point I want to enter I get filled.

I also attach a stop order to every entry I make. This puts the order on the brokerís server so that if I lose Internet connection my order will be executed if the trade goes against me.

This doesnít work for everyone but works for my trading.

Yup, that's what I would also use myself.


ghl123 View Post
Thanks @Fadi, just out of interest, which order type would you (traders) choose? Stop or limit orders? And why?

Read again my first reply this is what I personally do...


Quoting 
If you are using the stop to protect a position, I would prefer to use the stop market or simply a stop order so that in the case the trade turns sour on you and hits your stop, you exit immediately!
If you use a stop limit, in case of crashes especially, the price can go down on you, hit the stop and activates your limit order, but also continues to go down without ever filling you at your desired limit!

If you are using the stop to enter or initiate a trade, I would prefer to use the stop limit so that I control the exact price at which I take the trade.


Successful people will do what unsuccessful people won't or can't do!
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You also need to be aware of the native order types for the exchange you are trading. For instance, there is no stop market order type for Globex, so IB actually holds a stop order on their servers and then sends a market with protection order when the stop price is triggered. If you submit a stop limit order, then your order is sent directly to Globex. IB's TWS also has a stop with protection order that is native, although Sierra Chart doesn't support this order type.

I prefer to have my orders directly on Globex to minimize slippage.

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