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Mitigate Risk: Stop Loss vs Stop Limit

stop loss vs stop limit

Stop Loss vs Stop Limit

When unable to manually place an order, traders who wish to limit possible losses might use a variety of orders to enter and exit the market, such as stop loss vs stop limit. Understanding the distinctions between these two instruments is important to mitigate risk.

What is a stop loss?

One of the most effective tools traders have for limiting the amount of losses on their trades is a stop-loss order. The cost of an asset might fluctuate frequently. Many exchanges and platforms offer stop-loss orders to help traders reduce the maximum amount of loss they could suffer.

A stop-loss order functions easily. A minimum price can be set by traders for the assets they are trading. To prevent further losses for the trader, the platform automatically places a sell order when this minimum price is achieved. When trading assets that are typically more volatile, stop-loss orders are very beneficial.

Stop loss is a must when you are trading with a prop firm. In FundYourFX, every position you open in the market must have a stop loss linked to it. The stop loss needs to be placed within 30 minutes after the opening of the position. Unless you are a scalper who opens and closes trades within a period of fewer than 30 minutes, in that case, you don’t need to set a Stop loss.

Having a stop loss is for the trader’s own good as it reduces the risk of significant and uncontrollable losses in volatile trades. In fact, whatever assets you trade, be it cryptocurrency, forex, or commodities, a stop loss is a necessary discipline.

How to put a stop loss showing the risk taken
Stop Loss – FundYourFX

What is a stop limit?

Stop-limit is similar to stop-loss. However, there is a limit on the price at which they will execute, despite what their name implies. A stop-limit order specifies two prices: the limit price and the stop price, the latter of which will turn the order into a sell order. The sell order changes from a market order to a limit order that will only be executed at the limit price or higher.

Since they were placed mainly to reduce their loss when the price was falling, many traders would cancel their limit orders if the asset price drops below the limit price. They will only wait for the price to increase again because they lost their chance to exit. In the event that the asset rises further, they can decide against selling at that limit price at that time.

What is the difference between stop loss and stop limit?

When a market is highly volatile, a stop-limit order is used as protection. You are allowed to sell your asset, but only up to a specific point. A stop-loss order, on the other hand, can guarantee your trade. The same protections that help you keep your losses in check when using stop-limit orders also work to keep your trades from ever selling the asset.

Benefit and risk of stop loss.

Stop-loss orders provide traders the ability to not constantly watch their assets, which is one of its key advantages. With a stop-loss order, a trader can be sure that when a certain price is hit, an automatic sell order will be set. In this way, traders may stop worrying about keeping an eye on their assets in case the price is falling by setting stop-loss orders. Not to mention that a stop-loss order, which can be put at a price higher than the price at which an asset was bought, might help traders in still achieving profits.

However, although stop-loss orders help ensure execution, they typically result in price volatility and price slippage. The majority of sell-stop orders are completed below the limit price; the difference mostly relies on how quickly the market is falling. If the cost is falling rapidly, an order may be filled at a much lower cost.

Benefits and risk of stop limit.

A price limit can be ensured by stop-limit orders, but the deal may not be carried out, particularly if the asset price is moving quickly. Stop-limit orders are used when an asset’s price has fallen below the limit price but the trader does not want to sell at the current low. They are willing to wait for the price to rise once more to the limit price. If the order is not completed before the market price drops through the limit price in a quick market, the trader may suffer a large loss.

Bottom Line

For both long and short traders, stop-limit and stop-loss orders can offer various kinds of protection. While stop-limit orders ensure the price, stop-loss orders ensure execution. So you should learn about the several methods you may control your order before placing your trade; that way, you will be far more likely to get the result you want.

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