Stock / Share Market
by 5paisa Research Team Last Updated: 2022-06-01T10:56:34+05:30

What is a Stop Limit Order?

Stop limit orders are financial instruments that allow investors to maximize profits and minimize losses. According to the Securities and Exchange Commission (SEC), stop orders are conditional transactions that combine both stop and limit orders into a single tool that investors can use to mitigate risks. Stop limit orders give traders precise control over when an order is executed, but there is no guarantee that it will be executed.

Stop limit orders are a combination of stop characteristics and limit order characteristics and are conditional trades used to reduce risk. When a stock reaches or exceeds a stop price, a stop limit order triggers the submission of a limit order. This is related to other order types, such as limit orders that buy or sell a certain number of stocks at a price and stop-on-quote orders that buy or sell securities when the price has exceeded the specified points.

A stop limit order consists of a stop price and a limit price. The stop price is the price at which the limit order is activated and is based on the last trading price. The limit price is the price constraint required to execute an order after it has been triggered. Like limit orders, stop limit orders do not guarantee that a trade will take place.

How Stop-Limit Orders Work?

As soon as you enter a stop limit order through the online trading platform, the order will be placed in the exchange's order book. The order stays there until it is triggered, expired, or canceled.

When ordering, determine the validity period. You can select a Goodtilcanceled (GTC) order. That is, it remains in the order book until it is triggered or canceled. You can also place an order only in the trading session of the day. In this case, use daily orders to instruct the exchange to cancel the order if the order is not fulfilled by the end of the day.

Stop limit orders are only valid during normal market hours from 9:30 am to 4:00 pm. These orders will not be fulfilled during non-business hours or pre-market sessions. These are usually times when trading volumes are very low.

Why Do Traders Use Stop-Limit Orders?

Stop Limit Order can be used in several ways like:

  • Buy Stock: You can use the order to buy the stock when the price reaches a certain level.
  • Stop-loss from the long position. You can use an order to close a long position when the price goes down.
  • Stop the loss from the short position. You can use an order to close a short position when the price goes up.
  • To short sell a stock: You can use the stop-limit order to short sell a stock when the price drops to a certain level.

These are the situations, in which you can use a simple stop-limit order. However, if you have a small transaction volume, you may be paying too much or selling too little. This allows traders to use stop limit orders. They can choose the marginal price they want to buy or sell.

The ideal situations to use a stop-limit order:

The use of certain order types in certain situations depends on the trading strategy used by the investor. You must consider the following when using stop limit orders:

If you are trading illiquid stocks: If you try to sell a position on a thinly traded stock, because of lack of trading volume, you can get filled 10%, 20%, or more away from the current market price. By applying a limit on your order would result in your order getting gradually filled as buyers feature in through the session to purchase the stock

If you are trading part-time: It is not possible for all traders to monitor stock market trading apps and purchase orders all day long. It is recommended to use semi-complex orders such as stop limits that provide additional security compared to a simple stop order.


1. You can use the chart to determine the key level 

 It is wise to place a stop limit order where you expect other traders to buy or sell. These levels are often important levels of support and resistance, or previous major highs and lows. Analyzing the stock chart is a good way to determine these important levels. You can use the Horizontal Lines tool on the charting platform to find areas where the market has changed in the past. Once you find these important levels, it's a good idea to order around them. In many cases, you can expect liquidity to increase as prices approach.

2. You can take stock volatility into account when setting limit prices. 

If you set the limit too tightly, you are less likely to have a fill. If you set the limits too loosely, you may be paying a bad price. This can hurt you in case of greater losses or smaller profits. It is important to consider the volatility of stocks. The higher the volatility, the wider the required limits.

3. You must watch out for Trading Volume and Liquidity

It is important to analyze the trading volume of stocks when deciding whether to use stop limit orders. It is also wise to decide where to place the restrictions. If your stock has been very liquid in the past, it may be better to use unlimited stop orders. If your stock is too liquid, we recommend reducing your position size. Therefore, you can manage your risk smarter.

Risks associated with Stop Limit Orders

Stop limit orders have several potential benefits. However, there are many disadvantages and risks with this type of order.

1. Your orders may not get filled

There are situations where your stop is triggered, but the liquidity is so low that the market is online trading just above your limit price. In this case, your order may not get filled at all. The stocks may trade below the limit and you could be holding a losing position

2. Only partial fill is available

Again, due to lack of liquidity, you could end up selling only a small portion of your position. When the price plunges, you could still be holding shares below your stop loss level. These small-scale losses can eventually lead to large losses.

3. May pay higher fees

Depending on the fees of the broker, you may end up paying more fees if the order is executed in multiple parts. You normally pay the broker a minimum order fee for every transaction. Due to lack of liquidity, stop orders can be executed in three separate trades over several days. You will eventually be paying the minimum order fee 3 times. If you sell your position in the market, you will pay once.

Before you start trading, you must consider all the risks associated with this order type.


When it comes to smart trading, choosing the right order type can be complicated. It is recommended to scrutinize the market for the best opportunities and to analyze the hottest stocks. Keep up with the news and manage your risks/rewards prudently. It's a huge process and can be intimidating. However, if you use the right tools you can manage all of this every day with ease and convenience.

The Stop Limit Order is useful for active traders, especially those who trade thin penny stocks. Understanding the order type is an integral part of a smart trading strategy that gives you a better understanding of how other traders navigate the market. Stop limit orders are subject to volatility and trading volume and should be handled with caution.

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