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Stop limit orders are very powerful in the stock market if used correctly. They can give you a new way of placing a trade that can potentially benefit you.

So when might it be a good idea to place a stop limit order?

1. When a stock is at resistance and you are expecting it to break through.

Say a stock is at a key level of resistance of $45. If the stock breaks through to $47 you are willing to consider it a breakout and take the trade. And if it does break out you have a target of say $55.
Well that can be good, but what if the stock breaks through gaps up and opens at $52. Suddenly you are filled at $52 and risking it coming all the way down breaking through the $45 level just to make $3.

Instead you can place a stop limit order with a stop of $47 and a limit of $48. This way if the stock breaks up out of resistance your stop order would be triggered. But you would only get filled if you can get into the stock for $48 or better. This way your risk to reward can be managed.

2. When the stock is bouncing off support.

If you are trying to catch a stock as it bounces off support you might want to wait for it to start bouncing first. But similar to the breakout you have a target and do not want to get filled if the stock gaps up too high.

In addition to these you should also know when not to use a stop limit order. If you buy a stock for a short term trade you should never use a stop limit order to limit your losses. Why? Because if you have a stop limit order with s top of $20 and a limit at $18, if the stock falls down to your stop you will only sell the stock if you can sell it for $18 or higher.

Now if the stock hits your stop you are out. If the stock gaps down to say $17 you want to take the small loss and run. You do not want to hold onto it and have it fall to $15, $10 or even lower.

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1 comments

Equity Trading said... @ February 20, 2012 at 1:17 AM

I observe one thing in your article that way of expressing things so good and knowledge about subject perfect but you can know more stop loss

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