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Learn the Difference Between a Stop Order and a Limit Order

, | March 8, 2024 | By

In futures trading, order type matters. Markets, limits, and stops are three varieties of orders implemented to enhance strategic efficacy. In this blog, we will examine stop order versus limit order functionalities and how each can help you optimize your performance in the live market.

Gain Precision with Limit Orders

A limit is an order type where the associated buy or sell is to be executed at a specific price or better. Limit orders boost precision because they rest at market until filled at the trader’s desired price level. Limits are valuable tools for reducing slippage, promoting exact market entry, and establishing profit targets.

Futures markets can be fast-moving, volatile atmospheres. Limit orders let traders open new positions and take profits from positive trades efficiently. The basic functionality of limit orders is as follows:

  • New bullish trade: To open a new long position, a buy limit order is placed below price. When the buy order is hit, it is filled at the specified price or better.
  • New bearish trade: To open a new short position, a sell limit order is placed above price. When the sell order is hit, it is filled at the specified price or better.
  • Bullish profit targets: Placing a sell limit order above an active long entry provides an exact, profitable exit.
  • Bearish profit targets: Placing a buy limit order below an active short entry provides an exact, profitable exit.

One of the great things about being a modern futures trader is having access to the software trading platform. A robust platform takes the mystery out of the stop order versus limit order dichotomy through single-click order placement. Placing a limit order is straightforward: All you have to do is specify your order type as “limit” and click on a desired buy/sell price on the platform’s depth-of-market (DOM). Opening new positions or placing profit targets via limits really couldn’t be much easier.

Managing Risk with Stop Orders

Like a limit order, a stop order is assigned a distinct price level where it rests at market until elected. However, the key difference between stops and limits is how the order is actually executed. When the price reaches the defined level, the stop order is immediately filled at the best available price.

Stop orders are ideal for managing risk in the live market. Here is a quick look at their functionality:

  • Bullish trade: To place a stop order on an active bullish position, a sell stop is placed below entry price. When the order is hit, the long position is liquidated.
  • Bearish trade: To place a stop order on an active bearish position, a buy stop is placed above entry price. When the order is hit, the short position is liquidated.

Any trades are educational examples only. They do not include commissions and fees.

To illustrate the utility of the stop order, assume that Gretchen the gold trader is long one lot of December gold futures from $1,700. Gretchen decides to accept a maximum downside risk of $500 on the trade. Accordingly, a stop order is placed at $1,695―50 ticks from the bullish trade’s entry point. If price retraces to $1,695, the stop order will be activated and the bullish position immediately closed out.

When it comes to risk management, the stop order versus limit order comparison is moot. Stops provide the trader with a conditional-yet-immediate exit from the market; limits aren’t designed for this purpose. However, stop orders are subject to enhanced slippage due to being filled at the best available price.

Maximize Your Performance by Examining Stop Orders and Limit Orders

In reality, the stop order vs. limit order trade-off is only one strategic concern posed to active traders. Stop-limit, multibracket, OCO, and basic market orders are other valuable tools that may be used to optimize performance.

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