I'm writing in regards to my interest in trying to fully understand the STOP ORDER and being aware of this one being a fairly fundamental concept for some.
(However as a beginner or not, you might feel the same confusion as I do regarding the following inconsistencies in the way I'll explain them)
It begins with this clay-trader explanation where he addresses the order type (in this case naming it "stop loss order") in minute 4, second 15 of the Youtube clip below (already redirected to the section).
As you can see, he refers to the order being an "I want out" method, so in other words we'll assume this is an EXIT strategy, which by definition must be a "selling type of order" and if you saw the full video fragment he never really talks about "buying" with a stop order. Another key point is how he divides it into both Market & Limit order being the subtypes of the StopLoss, then moves to explain each.
In contrast, we see on this page of the "stock basics" Investopedia course under the "stop orders" section what I'll explain below...and by the way this is the exact definition and overall info of the Main article for "stop orders" which is this one: (https://www.investopedia.com/terms/s/stoporder.asp), main latter article just goes into a bit of depth and examples.
Stock Basics Article: https://www.investopedia.com/university/stocks/stocks4.asp
So, I'll fragment each key argument as follows (they're not that many) highlighting in BOLD what I grasped from that:
"Stop orders are contingent on a certain price level being attained to activate the trade. With a stop order, your trade will be executed only when the security you want to buy or sell reaches a particular price (the stop price)"
"Also known as a stop-loss order, this allows you to limit your losses"
Here we see on the first and second extracts of the section respectively how they clear out:
First, that the security in question can either be sold or bought (when on claytrader's video it was clear that it meant only a sell). And second that stop orders are also known as Stop loss. (the latter just to have in mind as we progress in this attempt to denote the real definition of the stop order, also clearing that clay didn't meant "another type of order").
- "One disadvantage of the stop order is that the order is not guaranteed to be filled at the preferred price the investor states. Once the stop order has been triggered, it turns into a market order, which is filled at the best possible price"
Now, here lies the major inquiry of mine, Why only market order? since as we saw the first video expands the stoploss into both market & limit.
Then I decided to look into the Main StopLoss article for Investopedia (I had only looked at the Main "Stop Order" article). To gain more insight..the paragraph below is for the "stop loss order gapping" section, in the article.
- "Price gapping is a major drawback of stop-loss orders and a reason why many experienced investors use stop-limit orders instead of stop-market orders".
Here is imperative that there must be a Stop Limit order and this doesn't seem to be a subcategory of StopLoss orders in general since they not only are market in nature but only have 2 variations: buy or sell...so it has to be a VARIATION. As you can see I'm not posting necessarily questions until now just the facts of my understanding however are my statements true until now? Which takes me to the final article for "Stop Limit Orders". Now my following question would be different.
Here I entered the article only for "stop limit orders", and found the description in quotes below...
- "The stop-limit order will be executed at a specified price, or better, after a given stop price has been reached. Once the stop price is reached, the stop-limit order becomes a limit order to buy or sell at the limit price or better".
Why on earth would an order that is triggered at a specific price be converted to another order that triggers at a specific price? I'm not sure I understand well but the nature of a Limit (not stop limit but limit only), is to only execute (buy or sell) at a target, then what is the point in placing the stop limit in the first place rather than just placing a limit?
Also, the question I said would be different is ...If the limit stop loss is an order that triggers a secondary execution...again: "Once the stop price is reached, the stop-limit order becomes a limit order to buy or sell at the limit price" then what is the difference with the conditionary/contingent order OSO/OTO "Order Sends Order / One Triggers Other" which by nature sends a second order once a threshold is attained?
Thankyou for being patient with me. I would love to know if you feel there are indeed inconsistencies and the answer to the last question.