Stop Limit Orders (Buy Stop & Sell Stop)

Winning in the Forex market means having a deep understanding of various order types and how to apply them in your strategies. Without these order types, executing trades and managing risk effectively can be challenging.

Stop limit orders are one of the many types of orders in Forex trading, and they allow traders to optimize their entries and exits and manage risks easily. Prop trading firms like Audacity Capital also encourage traders to utilize these orders to improve their returns and minimize losses as much as possible.

This article will take you through the different types of stop-limit orders and how to use them to increase your monthly returns.

What Are Stop Limit Orders?

Stop limit orders are trading instructions given to the broker to buy and sell an asset once the price hits the specified level, but only if the market falls to the predetermined limit price. In other words, the trader will set both the stop price and the limit price. Once the stop price is reached, the limit price will be automatically placed above or below the new price. Once the market triggers the predetermined level, a trade will be opened.

Stop-limit orders provide traders with greater control over their positions than stop orders. By using both the stop order and limit order, traders can minimize the risk of slippage and open positions at the best price available.

Types of Stop Limit Orders

There are two types of stop limit orders: Buy stop limit and Sell stop limit.

Buy Stop Limit

The buy-stop limit is usually set above the current market price. When traders want to buy an asset, they will specify a price above the current price of the instrument, the stop price. Once the market reaches the specified price, a buy limit order will be automatically placed at a lower level, which becomes the stop limit price. The buy limit will then be triggered once the market touches the stop limit price.

Buy-stop limit order is used by traders who anticipate that the price movement of their financial asset will experience a temporary downswing before continuing on an uptrend.

Example: Assume the EUR/USD pair is currently trading at 1.4500. The trader believes that if the market rises to 1.4600, it will continue going long. However, the trader does not want to buy the asset at a higher price. So, he places a stop price at 1.4600 and a limit price slightly below the stop price, for example, 1.4550. When the market drops to 1.4550, a buy limit will automatically be triggered, opening a long position.

Sell Stop Limit

The sell-stop limit is set below the current market price. In this case, a trader intends to sell the asset once the market drops to a certain level, which is the stop price, but only if the market slightly rises to the sell limit order.

A trader will specify a price below the current price of the asset. When the market reaches the specified price, a sell limit order will be automatically placed slightly higher. The higher level is what is called the stop limit price. Once the price rises to the stop limit, a sell limit order is triggered, and your trade is opened.

Traders who use the sell-stop limit anticipate that the price of the asset will experience a temporary increase before continuing on a downtrend. This order allows them to protect their profits and minimize their losses if the price moves against them.

Example: A trader wants to sell an asset currently trading at 1.2500. He believes the instrument will continue selling if the price declines to 1.2400. However, he does not want to sell the asset at a lower price. He places a stop price at 1.2400 and a sell limit at 1.2450. If the price hits the stop price, which is 1.2400, the sell limit is opened, and when the price gets to 1.2450, a short position is opened.

How to Use Stop Limit Orders in Trading

Whether a scalper, day trader, or swing trader, you can apply stop limit orders to different trading strategies, such as:

Trend Trading

Trend trading is about identifying and following the market direction. Stop-limit orders can be used to execute trades in the direction of the trend. For example, if the market is bullish, a trader can use a buy-stop limit to enter a long position when the price breaks the resistance level, which confirms trend continuation. A sell-stop limit can also be placed below the support level when the market is bearish.

Breakouts

If you anticipate a bullish breakout, you can use the buy-stop limit order above the resistance level. When the market indicates a confirmed outbreak, your order will automatically be triggered, ensuring you do not miss an entry. The same concept applies in a bearish breakout.

Gestión de riesgos

Stop limit orders are also beneficial when it comes to risk management strategies. It allows traders to exit a position when the price falls excessively. This, in turn, prevents selling financial instruments at very low prices.

Risk management in prop trading firms is also a must, so prop firms take advantage of orders, such as stop limit, to ensure their traders minimize their losses as much as possible.

Stop Limit Orders and Prop Firms

Proprietary trading firms encourage their traders to utilize stop-limit orders to improve their trading strategies and profitability. These firms provide trading capital, risk management plans, and sophisticated trading tools, ensuring traders have an easier time trading.

Order types, like stop limit orders, are mostly used in prop firms to manage risk effectively. They allow funded trades to set precise entries and exit points, which improves trading performance in the long run. 

Stop limit orders coupled with high leverage and enhanced execution make trading much easier and enjoyable in prop firms. Many prop firms partner with liquidity providers, ensuring their spreads are tighter, which enhances overall profitability.

Fast execution is another advantage of trading with prop firms. They ensure trades are executed at the best price, preventing losses. Lastly, you also get fair profit sharing when you trade with prop firms. Audacity Capital provides up to 85% profit sharing and funds your account starting from $15,000.

Conclusion

Stop-limit orders are fundamental trading tools that allow traders to gain control over their trades. These orders allow traders to execute trades at favorable market prices, ensuring they do not incur huge losses. They also allow traders to manage risk effectively and improve their trading strategies.

It does not matter whether you are a scalper or a day trader. Understanding how stop-limit orders work will ensure you remain profitable in the financial markets. Prop trading firms can provide a smooth trading journey by providing trading funds and the resources you will need to remain profitable. At Audacity Capital, you are assured of plenty of trading resources plus a funded account of up to $2 million.

FAQs

Is It Necessary to Use a Stop Limit Order in Trading?

No, there are many different types of orders you can use depending on your trading strategy. However, it is important to understand how stop-limit orders are used to avoid missing entries when an opportunity arises.

What Is the Difference Between a Stop Order and a Stop Limit Order?

A stop order is set to buy above the current asset price and becomes a market order once triggered. On the other hand, a stop limit order automatically places a limit order, ensuring you do not miss an entry once there is an uptrend or downtrend confirmation.

How Does a Stop Limit Order Help in Risk Management?

Stop limit orders allow traders to execute trades at favorable prices, ensuring they increase their returns. It also ensures traders don’t buy at very high prices or sell at extremely low prices.

When Should I Use a Buy Stop Limit Order?

A buy-stop limit is only used when you want to enter a long position, but you feel the price will slightly drop before continuing with an uptrend. On the other hand, a sell-stop limit is used when you want to enter a short position, but you feel the price will slightly go up before continuing with a downtrend. 

Are Stop Limit Orders Guaranteed to Execute?

No, just like many other types of orders, stop-limit orders are also not guaranteed to execute. If the price fails to hit the limit order after rising to the stop price, the order remains unfilled.

Why Use Prop Firms?

Prop firms utilize most order types, including the stop limit orders. This allows traders to manage risk effectively and execute trades at the best prices. Prop trading firms will also fund you and provide advanced trading tools to maximize your gains.