When Not To Use Stop limit orders

Stop limit orders can be very powerful if you use them correctly.  However there are certain times when you should just not use stop limit orders.

Before we go into when you should not place stop limit orders lets go into what they are first.  When you set a stop limit order you are attempting to buy a stock at a specific price.

It consists of two parts, the stop and the limit.  Let’s say we set a stop limit order with a stop at $50 and a limit at $55.  What that would mean is once the stock gets up to $50 the stop is triggered; now you will only get filled if you can in for a price under $55.

This gives you a ton of control over the price you get into the stock at.  So when should you avoid using this?

1.       When you just want to get into a stock.

Sometimes it isn’t worth it to be picky about what price you should get into a stock.  It could be that the stock fits your rules and is just a good buy; in this case you might want to just forget about getting in at the exact best price and just place the order.

2.       When you are limiting your losses.

When you are trying to limit your losses it is not normally a good idea to use a stop limit order.  Why, because it may not prevent you from taking large losses.  For example, you buy a stock for $30 and set a stop limit on it with a stop and a limit of $25.

Well if the stock goes down to $25 the stop will be triggered.  But you will not get filled unless you can get filled for $25 or more.  So if the stock drops down further you would not get out, which could make you lose a lot just because you were picky about the price.

If you are trying to limit your losses it is much better to use just a simple stop which will get you out as soon as your stop is hit.

For more on stop limit orders visit http://www.stocks-simplified.com/stop_limit_order.html