What is a Stop Limit Order: Overview, Definition and Strategy

Stop-limit orders are inactive conditional limit orders that only become active if the set “stop” price is triggered by price movements. Stop-limit orders combine the features of limit orders and stop orders, providing both greater control over trade execution price and risk mitigation benefits.

Stop-limit orders can be a useful way to time momentum purchases for buyers and set maximum loss limits for sellers. Unlike normal stop orders, which automatically convert into active market orders once the “stop” price is exceeded, stop-limit orders convert into active limit orders instead. This gives traders more control over the price at which the trade completes at and is the greatest distinction between a stop order and a stop-limit order.

This guide covers stop-limit orders and is part of a larger collection of guides which cover common order and execution types. Take a look at our table below to see the key features of stop-limit orders and how they stack up against other order types.

Order Type:Stop-limit orderMarket OrderStop OrderLimit Order
Price CertaintyCertainUncertainUncertainCertain
Execution CertaintyUncertainCertainCertainUncertain

How does a stop-limit order work?

Stop-limit orders differ from standard limit orders in that stop-limit orders aren’t live until the price of the security exceeds the set-stop price. The stop feature acts as a tripwire that activates a live limit order if triggered. If the stop price is exceeded, the corresponding limit order will then ensure that the order is only executed at the specified limit price or better.   

Stop-limit orders can be made as either sell-stop limit orders or buy-stop limit orders, and in either case, offer greater certainty of price, but not of execution.

What is a sell-stop limit order?

From a seller’s perspective, a sell-stop limit order is a conditional sell limit order that is placed only if the stock price falls beneath the designated stop-price. You will need to set a separate stop price as your floor and a separate limit price to establish the minimum price you would accept if prices fall beneath your stop price level.

Example

Stop-Limit Sell

You own shares of Microsoft (MSFT) at $220 today and are unsure about the future direction of the security. You would like to lock in your gains because you fear a steep decline if the price falls beneath $210. Using that as your sell signal, you set the following prices:

Stop price at $210
– Limit price at $205

If the stock price moves downward past the $210 stop price, the limit-sell order of $205 will be triggered; as long as there’s an available buyer, the order will be filled at $205 or better.

What is a buy stop limit order?

From a buyer’s perspective, a buy-stop limit order is a conditional buy limit order that is placed only if the stock price exceeds your designated stop-price. 

You will need to set a separate stop price as your ceiling, and a separate limit price to establish what’s the maximum price you will pay if prices exceed your stop price level.

Example

Stop-Limit Buy

Shares of Microsoft (MSFT) trade at $220 today; you’re a momentum trader and wish to only buy a security if it shows significant upward movement at $230. Using that as your “buy signal,” you set the following prices:

– Stop price at $230
– Limit price at $235

If the stock price moves upward past the $230 stop price, the limit-buy order of $235 will be triggered; as long as there’s an available seller, the order will be filled at $235 or better.

When to use Stop-limit orders

As a security-owner there are two typical scenarios where you may wish to place a stop-limit order.

  1. You have a specific target price in mind at which you would like to lock in gains.
  2. You want to mitigate your downside risk and wish to set a maximum-loss level.

Why do Traders use Stop-Limit Orders?

Traders use stop-limit orders to react to stock market price movements more quickly and easily, without having to constantly monitor market events. Stop-limit orders provide traders with greater control over both the time and price at which their trade is executed. This advantage is due to a limit order being placed instead of a market order that’s typical of stop orders.

One of the risks that traders run placing stop-limit orders is that there is no guarantee that their trade will be completed, even if their stop price is triggered. The limit order feature means that the trade only executes at the price limit set by the trader or better. If the market is volatile or a viable offer is never found at those prices, it’s possible for a stop price to be triggered while the limit order portion never completes. If execution certainty is a must, you should consider a stop order or market order instead.

How to place a stop-limit order

You can place a stop-limit order through the trade order system on most online brokerage accounts.

  1. First, select whether your trade action is either a buy/sell stop-limit order, depending on whether you wish to purchase the security or sell it from your current holdings, then make sure you enter the correct ticker symbol for the security you wish to transact.
  2. Second, make sure you select “stop-limit” as your order type and provide the following price points:
    • Stop price
    • Limit price
  3. Finally, enter how long you want your stop-limit order to remain outstanding, your typical options will usually be:
    • Day – In effect for the duration of the trading day. If the stop price is not triggered, the order will automatically expire at market close.
    • GTC – “Good til cancelled” – the trade will last through future trading sessions until the stop price is triggered, the order is cancelled by the trader, or it times out  beyond the maximum allowed order period.

When can I place a stop-limit order and when do they trigger?

While you can attempt to submit a stop-limit order at any time, they can only be activated during standard market hours, 9:30 A.M. to 4:00 P.M. Eastern time for the U.S. stock exchange. 

Stop-limit orders will not trigger when the market is closed, such as weekends or market holidays. They also will not activate during pre-market or after-hour trading sessions, nor will they be activated if the market experiences a circuit-breaker event that forces trading to halt.

Do Stop-Limit Orders expire?

Stop-limit orders will remain live on your brokerage exchange until triggered or cancelled. They also may expire if untriggered within the set-time frame you assign to them. This may differ by brokerage account, but most brokers typically cap your order period at 60 calendar days.

What are the risks of a stop-limit order and how can I mitigate them?

The main risk of a stop-limit order is that there’s no guarantee that the market price of your security will reach your desired limit price within a designated order period. As a result, investors run the risk of having their order fail to execute in periods of extreme volatility or for some thinly-traded securities. This risk is exacerbated if the range between the established stop and limit prices is too narrow. We’ve broken each of the main risks of a stop-limit order below:

Failure to execute

  • Security may never reach designated stop-price.
  • You can lessen the risk that your stop-limit order fails to execute by setting a reasonable target limit price or increasing the spread between your stop price and your limit price.

Partial fill

  • Depending on the order size, you may run the risk of a partial fill with unfilled shares, especially if there’s limited liquidity in the market.
  • Reduce your risk of partial executions by adding conditions to your trade. All or none, fill or kill, immediate or cancel, and minimum or cancel are good ways to increase the likelihood of full order completion.

Greater Commission Costs

  • Related to the risk of a partial fill, you may accumulate extra commission expenses, especially if your stop-limit order is split into multiple orders due to the size of your position relative to the liquidity of your target market.
  • Due to the elimination of trading commissions by many top brokerage firms, this is less of an issue today, however you may still incur some level of market risk if you’re forced to split an order across multiple trading days. You can reduce this risk by placing smaller order sizes and trading during periods of lower volatility (price movement).

If you require greater order execution certainty, a standard stop or stop-loss order may be a better choice for you.

What’s the difference between a Stop-Loss Order vs a Stop-Limit Order?

A stop-loss order is the same thing as a stop order made from the perspective of the seller. They are typically used when an investor wants to minimize the potential downside on an investment they own. 

Unlike a stop-limit order, a stop-loss order automatically turns into a market order once the specified stop price is reached. The stop-loss order then sells the security at the next best available market price. By contrast, a stop-limit order converts the stop order into a limit order once the specified stop price is reached. 

Both stop-limit orders and stop-loss orders allow you to set the floor price at which you’re no longer willing to hold your investment. The advantage of the stop-limit order is that it offers the seller greater control over the sale price of the investment, while a stop-loss order ensures greater certainty that your order will be filled. This difference is analogous to the same advantages and disadvantages that exist between a market order and a limit order.

Example

Stop-loss order

If you own an investment worth $25 and you wish to unload the security if it drops under $20, you can set a stop-loss order with the stop price set at $20. In this scenario, if the market price of the investment ever drops beneath $20, your stop-loss order will automatically convert into a market order once the stop level is breached, and execute at the next available market price, which could be any price below $20.

Example

Stop-limit order

Assuming the same $25 security mentioned above, if you wish to use a stop-limit order, you would set the stop price at $20 just like in the first scenario. However, for a stop-limit order, you will need to set a limit price as well. This will allow you to specify the price at which the security must be sold. For illustrative purposes, if you set your “limit” price at $19.50. This means that your order will only execute if the stop price of $20 is exceeded, and there is an available market price that allows you to sell your investment at $19.50 or better.

Pro tip: Market volatility and stop-limit orders
In normal markets, a stop-limit order offers greater price certainty on your sale price, but investors should be aware that they may not be able to execute a sale at their specified limit price, particularly if a willing buyer is not available. The risk of a stop-limit order failing to execute increases in volatile markets, as well as with investments that are thinly traded.

What is the difference between a limit order and a Stop-Limit order?

A limit order is a live order that can be seen by the market at any time, and indicates the price at which you’re willing to transact. By contrast, a stop-limit order is not a live order until the stop price has been triggered and the limit order is made live. Once the stop price is activated, the limit order is entered into the exchange and becomes visible to the market.

A limit order is simpler than a stop-limit order; limit orders only require you to set the price at which you want your security to be bought or sold. They ensure that your order is only completed at your specified limit price or better. 

By contrast, a stop-limit order is slightly more complex and requires two steps, you will first need to establish a stop-price that needs to be exceeded before you want your limit order to become live.

Example

Limit order

Step 1. Set the limit price.
“Buy/sell this security if the market price is $X or better.”

Example

Stop-limit order

Step 1. Set the stop price
Step 2. Set the limit price
“If the security reaches $Y price, then buy/sell the security if the market price is $X or better”

Pro tip: Setting stop-limit orders as circuit breakers
Limit orders usually expire if the trading day ends before they’re executed, which will require you to place another limit order if you’re unable to complete your trade. Stop-limit orders can be set as standing limit orders that only become live if the established stop price is exceeded. This makes them useful for setting circuit breakers to dump securities for sellers and setting targets of opportunity for buyers.