A financial market is a scary place for those who are a novice and even for the experts of the trade. The uncertainties and market changes keep a trader on the toe to avoid any discrepancy. Trading or investing in the various markets has always been a risky job as they have to be careful and alert 24 hours. This is hectic and patient work which is not everyone’s cup of tea.
To assist traders in having a smooth trade experience and be relaxed, brokers and market experts have developed the technology of stop-loss and stop-limit. These two market orders are helpful as they work on behalf of investors to stop an order by setting the limit or ensuring to minimize the loss from the trade. Who won’t use these orders to have a reduced trade responsibility?
With the article, we’ll be exploring the topic of trailing stop-loss vs limit. All the elements and concepts relating to the two and their use are discussed for easy understanding and trade application by the readers. So, let’s devel and be experts in technology.
What is a Stop-Loss Order?
A stop-loss order is an order that investors or market traders place with the online brokers to purchase or sell any specific trade instrument once it reaches the specified price. The price on which the trader wants to place their stop-loss order is decided on the basis of market condition, goals of the investors, and profit ratio of the trade.
Traders place their stop-loss orders carefully as they may incur a high loss if their prediction is wrong. Thus, we can say that a stop-loss is designed to limit the loss of traders on their security positions. The order is useful for all the investors of the market. It could be a day trader, long-term investors, short-term traders, or a regular market investor. All have access to the trading facilities of the brokers.
To make it more simple, let’s take an example, a day trader wants to invest in the stocks of a particular company and earn a profit by selling the same. For this, the day trader is required to close the trading position by the end of the day. But, before this happens, the price of the stock goes down.
For this situation of the market, the trader had set a stop-loss order which got triggered when the price fell below the set price. Thus, closing the market position and limiting the loss for the trader.
A trader can have the advantage of stop-loss as it gives some relief to the traders. They do not have to monitor the market position every time, and moreover, it does not have any extra cost.
However, it also has a disadvantage for long-term traders. In the market, changes are frequent; thus, the short-term market fluctuation can trigger the stop-loss and close the position. In such a situation, traders have to check with the market updates and the stop-loss in set intervals. Learn about Best Short Term Trading Strategies
What is a Stop-Limit Order?
Stop limit order is a multi-purpose order placed in trade. Traders use the limit order to buy or sell an instrument with a combined feature of a stop order and limit order. The market investor sets a stop price that works for both the trade orders. Instantly, the stop price is reached by the instrument; the stop-limit order is converted into a limit order.
The limit order then gets executed in the trade when the trading instrument is at a specified price or better price. This aid the traders earn a good market profit on the instruments and enjoying a smooth trade experience. In addition, traders get control of their investment’s price with which they want to execute the order.
In the execution of the stop-limit order or using it, traders should keep these key points in mind:
- When the market is fast-moving, the stop-limit order may not work as the price of the security traded moves away from the certain limit price set by the traders. So, the order does not work with all the limited orders.
- The stop-price and limit price of an order is not required to be the same. This makes the order an active limit order when the price reaches the stop price. For example, suppose the stop price of an instrument is set at $5, and it has a limit order of $4. In such a case, if the price reaches $5, then it would be an active limit order. But, the order is only executed at a $4 price or better than that.
- Stop-limits may be triggered with a short-term trade. Therefore, investors should be careful with the risks of such short-term market price changes. Thus, deciding when to use the stop order.
- The service of brokers with stop-limit orders should be analyzed first before putting it to use. It is necessary as the brokerage firms have different rules; they may use the last sale price as the trigger for the stop-limit order, whereas some may have a quotation price. Thus, it is helpful to check with brokers and determine the standard of placing the stop-limit orders.
How to use Stop-Loss Order and Stop-Limit Order?
Traders can use stop-loss and stop-limit orders easily with the simple process of creating a brokerage account. They have to visit the broker’s website; for example, let’s take the PrimeFin broker. So, here the trader visits www.primefin.com and clicks on the open an account option.
Next, they have to fill in the registration form to get themselves registered with the broker. Its name, email address, contact number, country code with a password. After which, the trader opens up with a new window requiring other personal information like tax reports, income sources, etc.
The third step is to answer the questionnaire for providing broker information and details regarding the trade experience and knowledge of the trader. This helps them guide the trader and have fruitful trading.
The following step includes uploading the documents for verification. Trading is a risky world, and brokers, for the security of the investors, check the valid documents and identifications of the trader. The documents may be an identity card, passport, license card etc.
Once done with this, traders select their trading account and deposit funds to begin market trading. They with the trading account get access to the services and facilities of the broker. The broker has analysis tools, trading platforms, stop-loss and stop-limit orders, indicators, expert advisors and many more features that help to predict the market movements.
Traders can install the trading platforms easily with PrimeFin; they have MetaTrader4. It is the best trading platform globally due to its flexibility and user-friendliness. After that, traders can open the software and click on the tools and open the order types.
Here, traders can place their orders, check them, set the stop-loss and stop-limit orders, make changes, have pending orders etc. Thus, the price could be set with the market analysis and set with this tool for having the market risks minimised.
In this simple way, traders can use the services of the broker and make an advantageous trade.
Trailing Stop-Limit vs Loss
Trailing means to get pulled along, and with the trailing stop-limit vs loss, we mean to understand how these work in the trade to make investing fun. We have till here understood what the two different order types are and how traders can use them with brokers help. But, what does the actual process of trail stop-limit vs trail stop look like?
First, let’s understand trailing stop-loss, which is also called a trailing stop. The trailing stop-loss is a type of market order that investors use to manage their market risks by specifying the price at which the trader wants to close the open market position when the price goes against the trader.
Hence, it limits the loss of the trader and makes trading for investors more comfortable. The stop-loss order set by the traders is effective until the market position of the trader is liquidated and when the traders cancel the order.
The investors specify it at a specific percentage below the instruments market price and not on a single value. As a result, the stop-loss trails behind the instruments as the price of instruments keeps moving.
As we have the heading of trailing stop-limit vs loss, so let’s check out another part of it. A trailing stop-limit is an order that is placed by the traders or investors with their broker. It then limits the loss of the trade at the set price of the instrument and helps the traders not to sell at too low a price in the financial market.
For example, a trader has a stock purchased at $15, and then the investor puts a stop-loss at $13 and a stop-limit at $ 12.50. So, suppose the price of the stock suddenly goes down to $10, here the broker will not execute the stop-loss as it is below the limit set of $12.50. To balance this situation, the stop-limit protects the trader against the speedy price decline of the stock.
Therefore, the stop-limit order was invented to allow the investors to specify their limit on the maximum loss of the trading instrument. In addition, it does not limit the possible gains from the trade. The sell trailing stop limit moves with the market price of the instrument and continuously recalculates the stop trigger price at the fixed price below the market price of the instrument based on the defined trailing amount.
In this situation, when the market price rises for the traded instrument, then the stop-loss and the stop-limit price also rise by the trailed amount and thus limit offset, respectively. In contrast, if the price of the traded instrument falls, then the stop-loss remains unchanged, and when they stop price hits the limit order, then it gets submitted at the last calculated limit price.
Thus, trading with the trailing stop-limit and loss orders is highly beneficial for the market investors as they can handle the market conditions without even being present all the time. The paragraph defined and highlighted the benefits and drawbacks of both the orders with their trailing stop-limit vs loss.
Difference Between Trailing Stop Loss and Trailing Stop Limit
In the trading business, investors imply various techniques to increase their market profits and reduce losses. Two of the most used techniques are stop-loss and stop-limit orders. Both are essential parts of the financial market due to their benefit for the investors, as they specify the conditions that automatically trigger the order into the sell position.
Moreover, both protect the traders against sudden market downswings. We have understood their work and use, but what makes these two different from each other? For that, we have listed below the points that make them unique and distinguishable from one another.
- Stop-limit orders help the traders have an exit strategy for their investment. However, the stop-loss only is limited to stop at the set price and minimize the loss.
- Stop-limit is dragged upward by the trail amount when the instrument’s open position price rises. While the stop-loss price does not change with the rise.
- Stop-limit performs two works of stop-loss and stop-limit, but stop-loss has only one work of stopping at the set price to avoid loss.
There are few differences between the two market orders, but they work separately to make the best possible trading conditions for the investors. The two important broker tools are highly used by the traders and make a profitable trade.
Trading could not have been this smooth and predictable if brokers didn’t provide or offer the services. Their advanced tools, softwares, analysis tools, indicators, trade strategies, etc., make it possible to have notifications ahead of their trade. Thus, trading with the satisfaction of not incurring high market losses. There are ample market opportunities due to the volatility, with the risks being a part of it.
To maintain such conditions, traders use stop-loss and stop-limit orders. However, they should, at certain intervals, keep checking with the orders as they operate on machines that can mislead sometimes. So, trading should be done with an alert mind and technology that supports the trade and minimizes the loss.