Stop-limit orders

A stop-limit order is exactly as it sounds: a stop order (also known as a stop-loss order) combined with a limit order. They function very similarly to stop orders, only instead of using a market order, which will close the position no matter what the price is doing, the stop-limit order sets a limit to the lowest (for sell orders) or highest (for buy orders) that you’re willing to accept.

When placing a stop-limit order, you enter two price points: a stop price, which is when the order triggers, and a limit price. If the stop price is hit during the set order duration, a standard limit order will be placed with the same duration.

Let’s run through some examples to show what it looks like, and why some might choose stop-limit orders instead of stop orders.

Stop-loss vs stop-limit:

To understand the different applications of stop orders and stop-limit orders, let’s look at a hypothetical situation with two possible resolutions:

Let’s say you have shares of a particular company who’s seen some growth, but may have some volatility on the horizon. To protect your profits, you place a stop order to sell for $100. That means if the price drops below $100, it will sell at the best available price. If the drop is slow and the trade volume is high, then the entire order might fill at $100. However, let’s say there is bad news after-hours, and the price drops severely on market-open as many people are trying to sell all at once. In this case, the best available price might be $70, which is significantly below your stop price.

Now, let’s say you decide that you want to sell at a $100 stop price, but you think (based on your own research) that the stock is worth $80 at the bare minimum, and believe that it will recover to at least its $80 value once the volatile period passes. Using a stop-limit order, you can set a $100 stop price and a $80 limit to satisfy both of these concerns. Now if the price drops below $100, it will sell at the best available position, as long as that position is at least $80. If the drop is slow and the volume is high, it might still fill at $100. However, if market forces drive it down too quickly and the best available price is $70, then the limit order will not immediately execute, and you can either cancel the order to ride out the volatility, or leave the order to execute once the price once again reaches the $80 limit.

In other words, a stop-limit order is like a conditional stop order that will not fill if the price drops below the point at which you’d rather ‘ride it out’.

Stop-limit orders for short sellers

Much like the relationship between stop orders for short and long positions, stop-limit buy orders can be used to buy back shares if it crosses a set threshold, with a limit on the price at which you’re willing to pay.

Stop-limits are commonly used in short selling to make sure that you don’t accidentally lock in unreasonable losses due to a temporary spike in share price.

A word caution about stop-limit orders

As with everything in investing, stop-limit orders are not guaranteed to always work in your favour. While stop-limit orders can be very helpful, it’s important to understand that if a price rapidly drops beneath your set limit, there is no guarantee that it will recover to the limit that you set.

It’s important to treat stop and limit prices like all your other investing decisions: applying an appropriate level of forethought and research can help you to make sure your stop orders function as intended.

Important to know:

• When buying shares using stop-limit orders, your trades get executed when your limit price matches the market’s ask price. When selling, your limit price is executed when it matches the market’s bid price
• You can use stop-limit orders on both Canadian and U.S. exchange-listed securities
• Using stop-limit orders may help you avoid ECN fees.
• Stop-limit orders cannot be used with the GTEM order duration for pre- or post-market trading