Risk management strategies are your way to counter the risk associated with Forex or CFD trading. However, to be able to utilize these strategies very well, you need to understand how to use them properly for you to maximize their benefits. This time, let’s take a closer look at this risk management strategy that’s commonly used in trading nowadays – the Stop Limit Order.
Understanding Stop-Limit Orders
A stop-limit order has a combination of features of stops and limit orders. This is used to mitigate the risk associated every time you open a position. This type of order is related to other order types like limit orders and stop-on-quote orders. To be able to use stop-limit order, you have to set two price points.
Stop – it is the start of your target price.
Limit – it is the outside price of your target for the trade that you will open.
Additionally, you also need to set a specific timeframe that will determine when the stop-limit order will be executed. The main benefit of this order is to precisely take control of your trade whenever you open one. Its downside would be the unguaranteed execution if the stop price is not reached over a specific time period.
Stop-limit orders get executed every time a specific price has been reached. After it is reached, this stop-limit order then becomes a limit order that either buys or sells under a limit price. This order is made available by almost all online brokers nowadays.
What are the features of stop and limit orders?
A stop order executes when a price that was set is reached then it gets filled with the current market price. Traditionally, a stop order is filled no matter the changes in the market price after the trades get completed.
A limit order, on the other hand, is an order that is set at a particular price. It gets executed at a limit price or when it becomes more favorable at the limit price. If there are instances in which the price becomes unfavorable, the activity which is related to the order will be automatically stopped. But if you combine these two orders, you will enjoy greater precision when it comes to executing your trades.
Stop orders are activated at the market price by the time the market price gets stopped, no matter the price changes of the position. Because of this, trades can be completed at a lesser price in case the market gets adjusted quickly. When you combine stop orders with limit orders, your open trades are halted whenever the prices get unfavorable on your end. In the stop-limit order, if the stop price gets triggered, the limit order will then take effect to make sure that the order will not be completed unless the price of the asset is better than the specified limit price of the investor.
Understanding how stop-limit orders broadens your knowledge about this risk management tool. You may not totally eliminate risks in CFD trading but you are lucky enough to have these orders so you can execute your trades appropriately.