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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 $.

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I would be using stop limit orders for stocks that are not too volatile. If you look at the chart and there are not many gaps especially after peaks, then you have more chance of being filled at your specified stop loss level using a stop limit order.

If the stock is very volatile and has a large or many gaps down after most peak, then I would consider using a stop market order to make sure you do get out even if it is somewhat past your desired stop level.

One think to consider is to avoid trading very volatile stocks that gap often. This is what I do, and using stop limit orders my stop level is achieved more than 95% of the time.

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  • but why would you need a stop limit order on a stock that is not volatile?
    – EkoostikMartin
    Jan 21, 2015 at 22:58
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    @EkoostikMartin - because all stocks drop in price at some time, so unless you want to sit in front of the screen all day monitoring your stocks you need to place stop loss orders. Also stop loss orders take emotions out of your trading which is important if you are trying to follow a trading or investment plan. If you are not using a physical stop loss order and your stock falls to the level where your plan says you should have a stop loss, then your emotions can take control - eg. You may say to yourself no I won't sell now it will bounce back tomorrow, but tomorrow it falls another 5%.
    – Victor
    Jan 21, 2015 at 23:25
  • Everything you are saying makes sense for a simple stop loss order, but the original question was about a stop loss order with a limit.
    – EkoostikMartin
    Jan 22, 2015 at 22:57
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    @EkoostikMartin - there are times when a stop limit order may be preferable to use than a stop market order. My broker allows for a 3 point buffer from the last sale for market orders. So if trading a stock that does not gap very often I actually may get a better price with a stop limit order. Like I said, I end up achieving my stop price or better more than 95% of the time by avoiding very volatile stocks and using this method. If you use stop orders in your investing/trading then it should be something you experiment with to get the best order types that suits your type of trading.
    – Victor
    Jan 23, 2015 at 11:37
  • Are you saying you set the gap between your stop price and your limit to less than 3 points? And thus get a better price on the sale by shortening that 3 point buffer on normal market orders?
    – EkoostikMartin
    Jan 27, 2015 at 16:23
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This is to protect your position in specific highly volatile market conditions.

If the stock is free falling and you only have a stop order at $90, it's possible that this order could be filled at $50 or even less. The limit is to protect you from that, as there are certain very specific times where it's better to just hold the stock instead of taking a huge loss (ie when price is whipsawing).

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    If the price drops from $100 to $50 all at once (which I don't think will ever happen) it is most likely there is something very wrong with the stock, so I would want to get out as soon as possible before the price drops to $20 or even lower, so I would never use a stop limit order for a situation like this.
    – Victor
    Jan 21, 2015 at 23:37
  • -1, the whole point of stop loss orders is to get you out if the price goes againt you, not to stay in the stock if the price gaps your stop loss order.
    – user9822
    Jan 22, 2015 at 21:58
  • @MarkDoony Yes, that is the point of a simple stop loss order, but the question was when would you use a stop loss order with a limit. My answer addresses that.
    – EkoostikMartin
    Jan 22, 2015 at 22:59
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    No it doesn't, your answer says if your limit stop is gapped then maybe it is better to hang on and not sell. In this type of situation where the stock can gap a long way, you should never use a limit stop. Do you know you can use a limit stop to buy into a stock, this would be more appropriate because if the stock gaps up too much you avoid buying the stock.
    – user9822
    Jan 22, 2015 at 23:04
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    As Victor mentions it can be used with less volatile stocks that don't gap often.
    – user9822
    Jan 23, 2015 at 6:12

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