Stop-loss and stop-limit: which type of order should you choose?

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To determine the best time frames for swing trading, you need to understand how much time you are willing to spend on your PC, what type of swing trading you choose and how much you want to earn. H1-H4 is the most comfortable time frame that combines the benefits of short and long intervals.

When you trade in the Forex market or other financial markets, it is extremely important to observe the rules of risk management. Limiting the losses is one of the main rules. The brokers offer several instruments to avoid critical losses, including Stop Loss and Stop-Limit orders. TU analysts have prepared a guide for you featuring the definitions of these orders, the key difference between them and the best time to use them.

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What is Stop-Loss and Stop-Limit?

Stop-Loss and Stop-Limit are the two types of orders that are very similar to one another, but there are certain peculiarities of their use, which we will tell you about later.

What is a Stop-Loss order?

A Stop-Loss order implies automatic buy or sell of an asset in case the price is moving in a direction that is unfavorable for the trader. For example, if you open a buy position, expecting the price to grow, but something went wrong and the price of the assets continues to decline. If the price falls lower than the critical level set by the trader, the position will be automatically closed on the Stop-Loss order, in order to avoid high losses for the trader.

Stop-Loss for a short trade

Stop-Loss for a short trade

What is a Stop-Limit order?

Before reviewing the stop limit notion, first we need to understand what a Limit order is. A limit order implies that the order can be executed only at a specific price set by the trader. For example, if you want to buy an asset at a better price, you can set a limit order at a level lower than the current price. In this case, a pending order is set, which is executed only when the asset price drops to the level chosen by you. If that happens, the order will be executed, the trade will be opened and you will wait for the price to go up and thus you will be able to earn more profit. In case of sale of assets, the limit order works in the reverse manner.

Now, let’s look at the stop-limit. A stop-limit order is something in between a stop-loss and a limit order. Essentially, the price of activation for the placement of the Limit order is added on the exchange. In this case, the stop price is used as a trigger for the Limit. If the price of the asset reaches the Stop level, a Limit order with the specific parameters set in advance is automatically created on the platform.

An example of Buy Stop Limit order

An example of Buy Stop Limit order

Stop-Loss and Stop-Limit Specifics

Stop-Loss and Stop-Limit orders are different orders and it may be difficult for a novice trader to tell the difference. Let’s briefly outline the specifics of each of the orders and compare them.

Stop-Loss Stop-Limit

Execution at current market price

Execution at the price set by the trader in advance

Designed to close the trade

Designed to create a limit order for subsequent opening of a trade

Protects against excessive losses through automatic buy or sell, if the price is moving in the wrong direction

Protects against excessive losses through placement of a limit order only in certain market conditions

Effective for all trades regardless of the market volatility

Effective in the volatile markets, when the price can leap sharply in different directions

Does not impact the amount of profit; protects only against losses

Allows to open a buy or sell position at a better price for the trader, and therefore make more profit

In case of a drawdown, it can be executed at a lower price, which could lead to higher losses than planned

In case of a drawdown, such orders don’t work, the trade will not open.

Can be used for Instant Execution and for pending orders

It is a limit order in itself, which is why the use for Instant Execution is impossible a priori

Has no expiration date, can be executed at any time

Expiration date can be set so that you don’t miss a later order execution in already different market conditions

Types of Stop-Loss and Stop-Limit orders

Each of these orders has several types. Let’s review each of them in more detail.

Types of Stop-Loss orders

There are two types of Stop Loss orders and an additional type which traders should know about.

The main types are:

  • Buy-Stop Loss. This type of order is set if a trader opens a short position (Short selling). The Stop-Loss is set above the current price. If the price moves up, and the trader suffers a loss, the order will limit that loss.

  • Sell-Stop Loss. This type of order is set if a trade opens a long position (trades long). In this case the order is set below the current price. It is filled if the price moves down, the asset becomes cheaper and the trade suffers a loss.

There is also one more type of a Stop-Loss order and that is Trailing Stop. This is a special type of Stop-Loss that can be both Buy and Sell. The two types of orders described above are adjusted manually and are fixed, while Trailing Stop is adjusted by the platform automatically and is floating. Perhaps you are also interested in information about which type of stop loss order is better.

The platform automatically traces the number of pips from the opening point to the current price. If the price does not move in the right direction, the order does not change its position and the price will be closed at the price at which it was initially set. However, if the price of the asset is moving in the right direction for the trader, there is no need to ‘adjust’ the Stop-Loss manually and monitor the trade. The trading platform will automatically change the position of the order to the point of profit.

Types of Stop-Loss orders

As for the Stop-Limit, there are also two main types of orders, which the trader should know about before using.

They are:

  • Buy Stop Limit. These orders can be executed only at the price set by you or lower. If the Ask price reaches the Stop level, the Buy Limit order will be set at the Stop Limit price level. Stop is always set above the level of Ask price, and the price of Stop Limit – below the level of Stop.

  • Sell Stop Limit. This is a mirrored image of the previous order. It can be executed only at the price set by you or higher. If the Bid price reaches the Stop level, the Sell Limit order will be set. The Sell Limit is always set above the Stop level, but below the Bid price.

In case of a drawdown of the price, Buy Stop Limit or Sell Stop Limit orders cannot be executed. Therefore, this instrument can be viewed as one of the good ways of protecting traders against big losses.

Examples of Stop-Limit

In order to understand what a Stop Limit order is better, let’s review the examples. In the first example, a trader is working with the EURUSD currency pair and sees based on the technical analysis that it will start to grow soon. However, the growth may turn out to be very sharp, and in that case the trade will lose part of the price, and therefore, part of the profit from the trade. In order to keep that from happening, a Buy Stop Limit is used. A trade sets the order at the price level of 1.16000, expecting that the price of the asset will break through this value and continue to move forward. The sharp growth happened later, but it did happen, and broke out Take Profit at the level of 1.16560.

A reverse example – if you decide to open a short trade, and, similarly, fear a sharp leap of the price. In that case, you need a Sell Stop Limit order. In the example, the Sell Stop Limit order is set at the level of 1.16400, and Take Profit – at 1.59990. The difference between these prices is the profit of the trader. If the trader opened the trade manually and later, the profit would have been lower.

Stop-limit and stop-loss – do I need it? Should I use it?

Stop-limit and stop-loss orders have different purposes, which is why the decision regarding their use is made for each case individually. Stop-limit is an instrument that allows you to ensure execution of the trade at the required price or at a better price under the condition that certain market conditions are observed. Stop-limit may seem too complex for the beginners, particularly if you talk about calculation of the price for execution. Therefore, because practicing setting such orders, it is best to test it out on a demo account.
Nonetheless, Stop-Limit may indeed prove to be very useful, particularly for high volatility markets (for example, such as cryptocurrencies). In this case, a trader has an opportunity to open a trade at the best price. Thanks to this, he/she can earn more profit from one and the same trade, because the trade will be opened when the price is lower or higher than the current price (depending on whether you are trading long or short).

As for Stop-Loss orders, TU experts conducted research on its use. The results of the survey of 1,500 respondents were as follows:

  • 64% – use Stop-Loss orders;

  • 22% – don’t use Stop-Loss orders;

  • 14% – sometimes use Stop-Loss orders.

Based on this a conclusion can be made that the majority of traders use this type of order to limit their losses one way or another.

Use of Stop-Loss orders

Use of Stop-Loss orders

Also the statistical data regarding the types of the used orders are important.

Based on the survey of the traders, who use stop-loss, we learned that:

  • 47% choose fixed stop-loss;

  • 29% use Trailing Stop;

  • 24% use both types.

Therefore, the use of Stop-Loss can indeed be considered justified in trading, but the choice of the specific type of order naturally depends on your trading strategy.

Types of used stop-loss orders

Types of used stop-loss orders

TU analysts particularly recommend using Stop-Loss orders to novice traders and traders with small deposits. Use of this instrument will allow you to limit losses, which is particularly important at the initial stages. The accurate calculation of the Stop-Loss level is one of the key skills of a trader at the initial stage. We recommend working on these skills using a demo account.

How to set stop-loss and stop-limit on a trading platform?

Setting Stop-Loss and Stop-Limit orders differs depending on the trading platform that you are using. We offer you a step-by-step guide on setting these orders using the example of the MetaTrader 4 trading platform. It is one of the most popular platforms, and is offered by many reliable and trustworthy brokers, for example Roboforex, XM or FxPro. Let’s see how to set orders step-by-step.

Who to set a stop-loss order?

In order to open a trader with a stop-loss, you need to access the trading platform, select the asset you are planning to trade and perform market analysis. After you learn what kind of a trade you will be opening, and what asset, and where exactly you need to set Stop-Loss, you will need to click on Buy or Sell on the platform.

How to open a trade on MT4

How to open a trade on MT4

Next, you will see a window with the order specifications. Here, you can set the type of execution – Instant or Pending. Stop-Loss can be set both for instant execution and for pending orders.

Setting stop-loss

Setting stop-loss

Next you need to choose the price at which your Stop-Loss will be set. If you are a novice trader, TU analysts recommend that you also set Take Profit to lock in your profit. After you set the price for the orders, you need to click on Sell or Buy, depending on the direction you plan to open the order in.

Stop-Loss and Take-Profit for a short position

Stop-Loss and Take-Profit for a short position

How to set stop-limit

The first steps here are the same as with opening an order with the stop-loss. After you’ve analyzed the market, you also need to open the window of opening an order by choosing Pending Order in the Type box instead of Instant Execution.

Selecting a pending order for setting stop-limit

Selecting a pending order for setting stop-limit

Below you will see another Type box. There, you can select the specific order. Click on it and choose Buy Stop Limit or Sell Stop Limit from the pop-down list.

Selecting a Buy Stop Limit or Sell Stop Limit order

Selecting a Buy Stop Limit or Sell Stop Limit order

Next, you need to specify the criteria for opening the order. In particular, you need to provide the price, stop limit price, stop loss and take profit. Please note that setting a stop limit order does not cancel the stop loss! You can choose these two orders simultaneously. Also note the Expiration box. If the order is not executed by that date, it will be cancelled. Use the expiration date to avoid execution of the order in case the market conditions have already changed. Now, you need to click on the Place button and your order will be placed.

Examples of the criteria of a Buy Stop Limit order

Examples of the criteria of a Buy Stop Limit order

What brokers offer Stop-Loss and Stop-Limit orders?

If you are planning to work with the stop-loss and stop-limit orders, it is important to choose the right broker. Not all platforms offer these orders, and therefore, if you are confident that you will need them, choose the company that has such an option. In addition, it is important that the broker is reliable and offers low commissions and fees. TU analysts have selected top 3 brokers for you that offer stop-loss and stop-limit orders and also meet the reliability requirements and provide good trading conditions for the traders.

Roboforex

Roboforex is a popular and reputable broker, which was established in 2009. As of 2023, the company has over 4.5 million active accounts. The company operates on the license of Belize regulator (IFSC), and offers tight spreads from 0.1 pips. Roboforex features ECN accounts, which allow traders to work directly with the liquidity providers.

The company offers 4 trading platforms: MetaTrader 4, MetaTrader 5, cTrader and R-Trader. R-Trader is a special platform developed for trading automation. One of its key features is the expert advisor builder. Traders can build their own trading robot without having coding skills.

FxPro

FxPro is a broker, which has been in the market since 2006. The platform offers traders an opportunity to work in the Forex market and with contracts for differences (CFD) on stocks, indices, commodities, cryptocurrencies. The broker operates on the licenses issued by the CySEC (Cyprus), FCA (UK), FSCA (SAR) and SCB (The Bahamas).

FxPro also offers its clients an opportunity to work on the MT4, MT5 and cTrader trading platforms. Setting of Stop-Loss and Stop-Limit orders is available with this broker. The company provides negative balance protection, supports automated trading and allows the use of expert advisors.

XM

XM has been operating since 2009. As of 2023, the company has over 3.5 million active accounts. The company has won more than 40 awards. XM offers tight spreads from 0.6 pips. The platform holds financial licenses from three financial regulators: ASIC (Australia), IFSC (Belize), CySEC (Cyprus).

XM offers MT4 and MT5 trading platforms for the traders. The company supports stop-loss and stop-limit orders. Also the broker’s clients can use XM analytics and trade automatically. There is also copy trading support from MQL5, MetaTrader traders community.

Comparison of brokers

Here’s a brief comparison of the aforementioned brokers. You can see the basic information in the table.

Brokers Licenses Platforms Stop-Loss Support Stop-Limit Support

Roboforex

IFSC

MT4, MT5, cTrader, R-Trader

Yes

Yes

Start trading

FxPro

CySEC, FCA, FSCA, SCB

MT4, MT5, cTrader

Yes

Yes

Start trading

XM

ASIC, IFSC, CySEC

MT4, MT5

Yes

Yes

Start trading

Summary

Stop-loss and stop-limit orders are different orders with different purposes and tasks. Stop-loss is designed to limit your losses in case of a bad trade, while stop-limit allows you to open a trade only in case favorable market conditions are formed. Before using either option, practice on a demo account and understand the principle of setting the orders in different cases.

FAQs

Are stop-loss and stop-limit orders available only on the MetaTrader platforms?

No. These orders can be available on any trading platform, including proprietary ones. They are also available on many crypto exchanges, such as Binance.

Do all brokers offer stop-loss and stop-limit orders?

Stop-loss orders are featured on the trading platforms of the absolute majority of the brokers. Stop-limit orders are rarer. Nonetheless, such an order is also quite widespread among the brokers.

Why is stop-limit good in volatile markets?

There is a considerable price movement in the volatile markets. And a pending order will be executed only at the price that you specified. This will allow you to earn more profit and will reduce the probability of losses at the same time.

Are drawdowns dangerous for stop-limit?

Practically no. In these cases, the order is executed very rarely. However, we do recommend envisaging a reserve for protection against drawdowns, so that execution does not take place in unfavorable conditions.

Team that worked on the article

Andrey Mastykin
Author, Financial Expert at Traders Union

Knows about
Trading strategies, technical analysis, Forex, stock market, long-term investing

Andrey Mastykin is an experienced author, editor, and content strategist who has been with Traders Union since 2020. As an editor, he is meticulous about fact-checking and ensuring the accuracy of all information published on the Traders Union platform. Andrey focuses on educating readers about the potential rewards and risks involved in trading financial markets.

He firmly believes that passive investing is a more suitable strategy for most individuals. Andrey's conservative approach and focus on risk management resonate with many readers, making him a trusted source of financial information.

Experience
Andrey's passion for finance began in 2009, and he has since accumulated extensive experience in trading and investing across various asset classes, including stocks, Forex, and cryptocurrencies.

He has spent over 15 years managing his own capital and working with financial portals, financial institutions, and IT companies, as a financial writer and analyst, further refining his investment expertise.

He is the author of several training courses on investing and trading in financial markets. Led multiple FX/Stocks/Crypto webinar educational presentations. Authored hundreds of articles on the global economy, stock, cryptocurrency, and Forex markets, along with trading strategies. He has also penned hundreds of professional reviews of financial firms.

Throughout his journey, Andrey has been heavily influenced by the works of renowned authors and investors like Benjamin Graham, Ray Dalio, Robert Shiller, and Nassim Taleb.

Dr. BJ Johnson
Dr. BJ Johnson
Developmental English Editor

Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.

The topics he covers include trading signals, cryptocurrencies, Forex brokers, stock brokers, expert advisors, binary options. He has also worked on the ratings of brokers and many other materials.

Dr. BJ Johnson’s motto: It always seems impossible until it’s done. You can do it.

Mirjan Hipolito
Cryptocurrency and stock expert

Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO). Mirjan is a cryptocurrency and stock trader. This deep understanding of the finance sector allows her to create informative and engaging content that helps readers easily navigate the complexities of the crypto world.