Limit and Stop Orders Explained
What is a Limit Order?
Limit orders are orders set on an open position which will close a trade at a predefined rate, which will ensure the trader will keep his profit. These orders are also known as “take profit” orders.
Limit orders help investors to buy or sell an asset at a specific price, or better. Limit orders come in two forms: Buy limit orders and Sell limit orders. Buy limit orders involve buying an asset at a set price or lower, while Sell limit orders involve selling an asset at the limit price or higher. These orders are extremely useful to investors, and they are frequently used as they play a big role in reducing the risks of trading, while securing the rewards.
How Do Limit Orders Work?
Buy Limit Orders
With Buy limit orders, the goal is for the investor to be able to buy an asset at a low price. So, for example, if a stock is trading at $10 a share, an investor may place a Buy limit order at $9 a share. When the stock price reaches or dips below $9 a share, the order will be triggered, and the investor will automatically acquire the desired number of shares at the $9 price.
Sell Limit Orders
To understand how a sell limit order works, imagine that an investor owns 10 shares of a stock, which is currently priced at $10 a share. If the investor wants to take a 10% profit from these stocks, they could place a Sell limit order at $11. Once the stock price reaches $11, the trade will automatically be executed, the stocks will be sold, and the trader will earn a profit of 10%.
What are Stop Loss Orders?
Stop loss orders are orders set on an open position which will close a trade at a predefined rate which is less favourable than the current market price. The purpose of using a Stop Loss order is to set a limit to possible losses on a certain trade. Stop loss orders prevent an investor from experiencing devastating losses in the event of a sudden asset price plunge.
How Do Stop Loss Orders Work?
Stop loss orders work by automatically triggering a market Sell order when the price of an asset reaches a certain point. For example, if a stock is priced at $100, a stop loss order may be placed by an investor at $75. So, if the price reaches or dips beneath $75, then this would trigger an automatic market sell order for the stocks that the investor owned. In this example, this would limit the investor’s losses to 25%.
Although stop loss orders are more commonly used for Sell orders, they can also be used for Buy orders. When they are used for Buy orders, the buy order is executed when the price of the asset climbs above a certain price. For example, if an asset is priced at $100, then a stop loss Buy order could be priced at $110. This can allow the investor to take advantage of rising price actions in the markets.
What are Trailing Stop Orders?
Trailing stop orders are orders set on an open position. This type of order is designed to allow traders to set a stop loss point at a fixed margin from the market price. So, if the price moves in favour of the open position, the stop point will change in accordance, keeping the same margin from between the stop loss and market price.
What are Stop Limit Orders?
A stop limit order is an order that is a sort of combination of a stop order and a limit order. With a stop limit order, after a certain stop price is reached, the order turns into a limit order, and an asset is bought or sold at a certain price or better. These orders are similar to stop limit on quote and stop on quote orders. These types of orders are ideal for traders and investors who prefer to make trades that have components of both stop orders and limit orders.
How to Use Limit and Stop Orders?
- Locate the position in the Open Position window, and right-click on it. Choose Limit and set your preferences for the order.
- In the desired position row, choose the limit column and click on it. Then, set your preferences for the limit order.
- On the trade tab, choose limit. Click on the desired position in the Set Limit Order window. Then, set your preferences for the limit order.
Why are Stop and Limit Orders so Useful?
As explained, Limit and Stop orders are orders which are set on an open position, predefining the closing rate of the position, in order to take profit or stop a loss of funds in an open position.
It is important to implement limit and stop orders as a risk management tool. In this way, it eliminates the need for an investor to enter their account daily to monitor how their stocks/trades are doing. This is convenient especially when you cannot be in front of your platform for extended periods of time.
It would be virtually impossible for a trader to spend 24 hours in front of his computer watching his trades move tick by tick, however stop and limit orders will come in great use when there are major market events that can happen in an instant.
These events generally take all investors by surprise, however, having your trades safely in check will either lock in your set profit or close your position should the event take your trades in a turn for the worst.
In the event that you are on your platform when a major event strikes the economy, the limit or stop order will be executed faster than any manual action.
Setting Limits and Stops with Market and Entry Orders
When setting a Market Order or Entry Order, you can set a limit and stop or trailing stop orders in advance. Check the Set Predefined Stop/Limit option and set your preferences.
Where do I see my order?
Your order will appear in two places:
- In the Orders window.
- In the Open Positions window, in the row of the position on which the order was set on, in the designated column for your order.
AVA guarantees all Limit orders will be executed at the specified rate, not a better rate. AVA does not guarantee it Stop Losses and Trailing Stop. If there is a sharp market move, and the current price of an instrument breaks through the client’s Stop Loss or Trailing Stop rate, the order will be executed at the next available price.