I understand that a stop limit order is basically a limit order when the market price reaches the stop price. But I am unable to figure out when to use this kind of an order?
For example, if I own stock A and I bought it at 100$ and put a stop at 90$ with limit at 85$, then the stop will only be triggered when A trades between 85 and 90, correct? But this defeats the very purpose of a stop (cut losses). Because if A gaps down to 80 (from 100) and keeps dropping, the stop-limit will not trigger and the losses would just keep growing.
So what is the use of this stop-limit order? It seems like I can only use it if I am confident that any drop below 85 would recover surely, hence I would not want to sell below 85 $.