A stop limit order is a conditional trade that combines the features of a stop order and a limit order. It requires two distinct price points: the stop price and the limit price. When the market price reaches your specified stop price, the order activates and becomes a limit order. It then executes only at your specified limit price or better.
For example, if you own a stock trading at $50 and want to sell if it drops, you might set a stop price of $45 and a limit price of $44. Once the stock hits $45, your sell order enters the market. However, it will only execute if the buyer is willing to pay at least $44. If the price drops rapidly below $44 before your order fills, the trade will not execute, and you will remain in the position.
This order type provides control over the execution price but carries the risk of non-execution. If the market moves past your limit price too quickly, your order may never fill. Trading involves significant risk, and investors should understand that stop limit orders do not guarantee protection against losses in volatile market conditions.
How this answer was produced
AI-assisted draft, human-reviewed by AlphaScala editorial against our standards before publication. General education, not advice for your specific situation.