If you’re trading stocks or other assets, knowing how to protect your investments is just as important as finding opportunities for profit. Two of the most common tools for risk management are stop loss and stop limit orders. Although they sound similar, they work in different ways and can affect your trades in unique situations.

What is a Stop Loss Order?

A stop loss order is an automatic instruction to sell a stock or other security if its price drops to a certain point. This tool is popular among investors who want to limit potential losses in unpredictable markets. By setting a stop loss, you tell your broker to sell the asset if it falls to your chosen price, which can help prevent bigger losses if the market suddenly turns.

How Stop Loss Orders Work

When the set price—called the stop price—is reached, your stop loss order turns into a regular market order. This means your shares will be sold at the next available price, but that price may not match your stop exactly. In fast-moving or volatile markets, prices can change quickly, so you might get less than you expected.

For example, if you set a stop loss for a stock at $50, but the price drops rapidly past that point, your shares might sell at $49 or even lower.

Why Investors Use Stop Loss Orders

Many investors use stop loss orders to help take the emotion out of trading decisions. It can be tempting to hold onto a losing investment with the hope that it will bounce back, but this strategy often leads to deeper losses.

Setting a stop loss requires you to plan ahead and stick to your strategy, even during stressful times. It’s about protecting your money and staying disciplined.

Things to Consider Before Setting a Stop Loss

The right stop loss level depends on your goals and the stock’s normal price swings. Setting it too close to the current price could mean your shares get sold during a small, temporary dip.

On the other hand, setting it too far away might leave you exposed to bigger losses. It’s important to look at the stock’s volatility and your own risk tolerance.

What’s Better, Stop-loss or Stop-Limit?

Whether a stop-loss or stop-limit order is better depends on your priorities as a trader. Stop-loss orders guarantee your position will be sold if the price drops to your chosen level, but you might get a worse price than expected during fast market moves. Stop-limit orders let you set the minimum price you’re willing to accept, but there’s a risk your order won’t execute if the market moves past your limit, leaving you stuck in the trade. 

In general, if you care more about definitely getting out of a losing position, a stop-loss is usually better; if you want to avoid selling for less than a certain price and can tolerate possibly not selling at all, a stop-limit gives you more control. Most everyday investors are better off with stop-loss orders for simplicity and peace of mind, while more advanced traders might prefer stop-limits for extra price control.

How Stop Limit Orders Work?

A stop limit order helps you manage your trades by letting you set two price points: the stop price and the limit price. Once the market hits your chosen stop price, your order becomes active.

But instead of buying or selling at any available price, the trade will only go through if the market stays at or better than your set limit price. This approach can help you avoid getting a worse deal during fast market swings, but it also means your order mightn’t be filled if prices move too quickly beyond your limits.

Many investors use recent price trends and technical analysis tools to decide where to set their stop and limit prices. For example, some traders might place a stop just below a recent support level and set a limit price slightly above it, hoping to reduce losses without selling too cheaply. Liquidity of the asset can also influence how effective stop limit orders are, since thinly traded stocks might not reach your limit price before moving further away. Developing a comprehensive risk management plan is crucial when using stop limit orders, as it helps you minimize potential losses and make informed decisions in unpredictable markets.

This kind of order is popular in volatile markets, where prices can change quickly. Remember, while stop limit orders can help you control your trades, they don’t guarantee your order will be executed.

An important difference is that stop limit orders ensure price rather than execution, which means your trade may not happen if the market moves past your limit price.

The Difference Between Stop Loss and Stop Limit

Understanding the differences between stop loss and stop limit orders can help you make better decisions during unpredictable market swings. Both types of orders are designed to help manage risk, but they work in distinct ways.

Stop Loss Orders: Focus on Fast Execution

A stop loss order turns into a market order once your chosen price is reached. This means your shares will be sold as soon as possible at the next available price. The main advantage here is speed—your order will likely be filled, regardless of sudden price changes.

However, you might end up selling at a price lower than you expected if the market is moving quickly. For example, if you set a stop loss at $50 and the price drops sharply to $48, your shares could sell at $48 or even lower. This can help protect you from bigger losses, but you mightn’t get the price you hoped for.

Stop Limit Orders: Greater Price Control, but No Guarantees

A stop limit order gives you more control over the price you receive. When your specified stop price is reached, your order becomes a limit order. This allows you to set the lowest price you’re willing to accept.

For instance, if you set a stop price at $50 and a limit at $49, your shares won’t sell for less than $49. The risk here is that if the market price skips past your limit (for example, dropping straight from $50 to $48), your order won’t be filled. This could leave you holding onto the stock as the price continues to fall.

Pros and Cons of Each Order Type

Both stop-loss and stop-limit orders are tools that traders use to manage potential losses and protect their investments, but they work in different ways and carry unique benefits and drawbacks.

Stop-Loss Orders: Quick Execution, but Prone to Slippage

A stop-loss order turns into a market order as soon as the price hits your chosen level. This means your trade is almost always executed, which can help you limit losses if the market moves against you quickly. For example, if you set a stop-loss on a stock at $50 and the price drops, your shares will likely be sold as soon as that price is reached. However, fast-moving markets or sudden price drops (gaps) can cause your order to fill at a much lower price than you planned, a problem known as slippage. This makes stop-loss orders reliable for execution, but not always for getting the exact price you want. Incorporating stop-loss orders into your trading strategy is a fundamental part of effective risk management that helps prevent significant losses during market volatility. Using stop-losses is also one of the best practices for money management in forex trading, helping traders protect their capital over the long run.

Stop-Limit Orders: Price Control, but Execution is Not Guaranteed

With a stop-limit order, you set both a stop price and a limit price. Your order becomes active once the stop price is reached, but it will only execute at your chosen limit price or better. This gives you more control over the sale price, which can be helpful when you want to avoid selling too low. For instance, if you own a stock trading at $60 and want to avoid selling for less than $59, you might set your stop price at $59.50 and your limit at $59. However, if the market drops below your limit price quickly, your shares mightn’t sell at all, leaving you exposed to further losses.

Stop Loss Vs Stop Limit: Choosing the Right Order for Your Needs

When picking between a stop-loss and a stop-limit order, it’s smart to think about your overall strategy and how much risk you’re willing to accept. These two order types manage your trades in different ways and can affect your results, especially when markets move quickly. Understanding how drawdown in funded trading can impact your account balance is also important when selecting the appropriate order type.

Stop-loss orders are a good fit if your main goal is to make sure your order is filled during big price swings. This type of order helps you get out of a trade quickly if the price moves against you. Just keep in mind, you mightn’t get the price you expected, especially when the market is moving fast—this is known as slippage.

Stop-limit orders let you set the exact price where you want to exit. This means you have more control, but there’s a risk: if the price drops past your limit too quickly, your order may not fill at all, and you could end up with a bigger loss than planned.

Many traders use technical analysis—like support and resistance levels, moving averages, or recent highs and lows—to help set their stop prices. Your comfort level with risk also plays a big role. Some people are okay with the possibility of slippage if it means they get out of a bad trade, while others would rather risk not selling at all than accept a worse price.

Here are a few things to keep in mind:

• Order certainty vs. price control: Do you care more about getting out, or about the price you receive?
• Market volatility: If you’re trading something that moves a lot, stop-loss orders might make sense. For less volatile stocks, stop-limits can work.
• Risk management style: How much are you willing to lose if things don’t go as planned?
• Use of technical tools: Do you rely on charts and patterns to set your stops?

In today’s markets, tools like trailing stop-losses or OCO (One Cancels the Other) orders can also help manage risk. For example, platforms like Thinkorswim or Interactive Brokers offer these order types for stocks, ETFs, and options.

Additionally, understanding the impact of order execution and how different order types respond to market volatility can further refine your trading strategy and risk management.

Should a Sell Stop Order be Placed Above or Below The Current Market Price?

A sell stop order should always be placed below the current market price. This type of order is used by investors who want to sell a security if its price drops to a certain level, helping them limit losses or protect profits. When the market price falls to the stop price you’ve set, the sell stop order turns into a market order and is executed at the next available price.

Placing a sell stop order above the current market price wouldn’t achieve the intended goal—instead, that would be called a sell limit order. To sum up, if you’re looking to use a sell stop order as a protective strategy, it should always be set below where the security is currently trading.

Stop Limit Order Example

A stop-limit order is a type of stock market order that helps investors control how and when their trades are executed. For example, if you own a stock currently priced at $100 and want to make sure you sell it if the price starts to fall, but only if you can get at least $90.50 per share, you would set a stop-limit order. In this case, you set your stop price at $90—so if the stock drops to $90 or lower, your order is triggered. However, you also set a limit price at $90.50, meaning your shares will only be sold if they can be sold at $90.50 or higher. This lets you avoid selling too low in a fast-moving market, but also means your order might not be filled if the price drops too quickly below your limit.

Conclusion

Deciding between a stop loss and a stop limit order depends on whether you prioritize getting your order filled quickly or controlling the price at which it happens. A stop loss order helps you avoid bigger losses by automatically selling (or buying) when a certain price is hit, but in fast-moving markets, you might end up with a worse price than expected. In contrast, a stop limit order gives you more control over the price, but your trade isn’t guaranteed to go through if the market moves past your limit. Both are tools to manage risk, so if you want to make sure your trade happens no matter what, a stop loss is usually better, while a stop limit is best if you care more about price than certainty.