A stop-limit has two prices: the stop, which is the trigger, and the limit. Nothing happens until the market reaches the trigger; then a limit order goes on the book at the limit price. It is used for breakout entries with a price cap and, less safely, for stop losses. The gap between trigger and limit decides how much slippage you accept.
Example
You hold a long from $50 and place a stop-limit sell with a trigger at $47 and a limit at $46.80. Normally, when price falls to $47, the order fills between $47 and $46.80. But if bad news gaps price from $47.20 straight to $45, the $46.80 limit sits unfilled and you are still long, now losing more than planned.
Why it matters
Stop-limits help when you would rather miss a fill than get a bad one, such as entering a breakout only if you can buy near the level. For protective stops the risk is the opposite: the trade you most need to close is the one that may stay open.
Common mistake
Using a stop-limit as a stop loss with the limit equal to the trigger. In a fast move, price jumps past both and the order never fills. If you use one, leave a reasonable gap, or use a stop-market for protection.
FAQ
- What is the difference between a stop-market and a stop-limit?
- Both trigger at the stop price. A stop-market then sends a market order and always fills; a stop-limit sends a limit order that fills only at the limit price or better.
- How far should the limit be from the trigger?
- Far enough to fill in normal volatility for that market. Many traders use a fraction of ATR: too close risks no fill, too far gives up the price protection.
- Can I use a stop-limit to enter a trade?
- Yes. A buy stop-limit above resistance enters a breakout only if price can be bought within your limit.