In this article, I will discuss stop loss vs stop limit and how traders make use of them. The similarities and differences.
First, let me touch on what a stop loss; and then I would explain what a stop limit is.
Here you go;
What is stop loss?.
Forex trading comes with some levels of risk. These risks depend on the ability of a trader to predict the direction of price movement correctly.
For a trader to beat the risk of losing a huge amount of money when a trade goes against his analysis, he makes use of a stop-loss order. stop-loss
Let us take some illustrations:
How can a trader who went long during a selling period minimize his loss? Such a trader can set a stop loss a few pips below the initial market price where he entered the trade to alleviate a huge loss.
Mr. Sam, an amateur forex trader decided to trade the GBPUSD currency pair when the market price was 1.25300. He decided to go long by setting a stop-loss order at 1.25290.
After some moment, the market made a bearish move far below the 1.25290 points, what will be the fate of Mr. Sam after the bearish movement?.
The trade went against his analysis which will make him be at loss but since he had set a stop-loss order at 1.25290, his loss will not be as much as that of any trader that entered long without a stop loss.
What is stop limit?
A stop-limit order is an order to stop when a price is reached and to create a limit order to buy or sell.
A stop-limit order is simply the combination of a stop order and a limit order. Two prices are specified, the stop price and the limit price.
What is a stop order? A stop order is an order to buy or sell a currency pair once the market reaches a specified price.
It is used to specify the point where a trader wants to start buying or selling a currency pair. If the price does not reach the stop order, a trade will not be triggered.
Let us take a quick example of what a stop order is:
Instead of sitting and waiting till the price hits 1.25280, I can place a stop order at 1.25280. My trade triggers once the price hits 1.25280.
Once the price reaches my specified position, my trade position sets open, and my trade triggers.
What is a limit order? Traders use a limit order to buy or sell currency pairs once the market price hits a specified price.
The specified price is usually higher than the current market price for a sell limit and higher than the current market price for a buy limit.
Stop Loss Vs Stop Limit – Similarities and Differences.
The main similarity between the two orders is that traders use them to minimize loss.
However, their difference is clear. Traders use stop loss in market execution while they use stop limit in pending orders.
Also, traders set a timeframe to show when order is executable while placing a stop-limit order. A stop-loss order does not need a timeframe.
In addition, traders set just a single price for stop loss while they set two prices i.e the stop price and limit price, for a stop-limit order.
A stop loss is an order that traders place just a few points below or above the current market price to alleviate huge losses in trading.
A stop limit on the other hand indicates a stop order and a limit order.
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