STOP-LIMIT ORDER
The stop-limit order is an extension to the stop order
and is designed to provide the trader with control over the slippage that often occurs when a stop order is executed.
In addition to specifying a stop price (at which point the stop order will be activated), the stop-limit order also
specifies a limit price beyond which the order cannot be filled. The limit price sets the amount of slippage that the
trader is willing to tolerate. Stop-limit orders are usually used when executing a large transaction volume where the
degree of slippage becomes significant.
Stop-Limit to Buy
A stop-limit order to buy has a stop price that is set above the current market price and a limit price (which is in effect a
buy limit price) that is set at
the stop price or at any price higher than the stop price. The range between the stop price and the limit price represents the
range of prices that the trader is willing to accept on the execution of the order. If the limit price is set equal to the
stop price, then the trader is not willing to tolerate any slippage: the order will be filled at the designated price
or it will not be filled. In the latter case, the order will remain active as a buy limit order at the specified stop-limit price.
Stop-Limit to Sell
A stop-limit order to sell has a stop price that is set below the current market price and a limit price (which is in effect a
sell limit price) that is set at
the stop price or at any price lower than the stop price. The range between the stop price and the limit price represents the
range of prices that the trader is willing to accept on the execution of the order. If the limit price is set equal to the
stop price, then the trader is not willing to tolerate any slippage: the order will be filled at the designated price
or it will not be filled. In the latter case, the order will remain active as a sell limit order at the specified stop-limit price.
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Mechanics of a Stop-Limit Order
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A resting stop-limit order is triggered when the stop price is traded on the market. The order then enters the order
book as a limit order with the customer’s specified limit price. The order is executed at all price levels between the
stop price and the limit price.
If the order is not fully executed, the remaining quantity of the order remains in the market as a limit order.
A buy stop-limit order must have a stop price greater than the last traded price for the instrument.
A sell stop-limit order must have a stop price lower than the last traded price. |
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