Quick definition An order that becomes a limit order when a specified trigger price is reached. Once triggered, the order only executes at the specified limit price or better. What it is A stop-limit order has two prices: the stop (trigger) price and the limit price. The order remains inactive until the market trades through the stop price. Once triggered, the order becomes a limit order with the specified limit price. It will only execute if the market reaches the limit price level. Why it matters Stop-limit orders provide more control than stop orders. A trader can place a sell stop-limit order at a stop price of $48.00 and a limit price of $47.90. If the stock falls to $48.00, the order triggers and becomes a limit order to sell at $47.90 or better. If the price falls below $47.90, the order will not fill. Stop-Limit Order versus Stop Order A stop order becomes a market order when triggered and will execute at whatever price is available. A stop-limit order becomes a limit order when triggered and will only execute at the specified limit price or better. A stop order guarantees execution once triggered. A stop-limit order guarantees price control but not execution. The gap risk Like stop orders, stop-limit orders carry the risk of a gap. If a stock opens below the stop price, the order triggers at the opening price. The order then becomes a limit order at the specified limit price. If the opening price is below the limit, the order will not fill immediately. Practical example A trader buys shares at $50.00 and places a sell stop-limit order with a stop price of $48.00 and a limit price of $47.90. If the price falls to $48.00, the order becomes a limit order to sell at $47.90. If the price continues to fall to $47.80, the order does not fill because the price is below the limit of $47.90. Advanced usage Traders sometimes use stop-limit orders with the limit price above the stop price to protect against gap risk. For example, a stop price of $48.00 with a limit price of $49.00 would fill any order triggered by a fall to $48.00, capturing prices anywhere between $48.00 and $49.00 if the market rebounds after triggering the stop. See also - Stop order - Limit order - Immediate-or-cancel (IOC) - Fill-or-kill (FOK)
