Stop Market & Stop Limit

This is the second in a series of articles that started Monday, October 23, 2006 with an article entitled “Limit Orders & Market Orders”.

Stop Market Order

There are two kinds of Stop Market Orders in trading eMini Stock Index Futures. One for buying and one for selling.

A Stop Market Order to buy becomes an order to buy at market when a specified price becomes part of the bid x ask quote.

A Stop Market Order to sell becomes an order to sell at market when a specified price becomes part of the bid x ask quote.

Usually, Stop Market Orders are used on two occasions. One is to exit a position with a loss before the loss gets worse. The second is to lock in an accrued profit to prevent the profit from slipping away.

For example, suppose you bought at 1380 and the current market price is 1385, which means you have an accrued profit of 5 points.

You can enter a Stop Market Order to limit the amount of loss in case prices move adversely. For example, let’s say you want to limit your loss to just 2 points. To do that, you enter an order to “sell at 1378 stop market.” If the price quote becomes 1378 bid, your order becomes an order to sell at market.

Also, you can enter a Stop Market Order to protect accrued profits in case prices move down instead of continuing to go up. For example, let’s say you want to protect at least 2 of the 5 points of accrued profit in this example. To do that, you enter an order to “sell at 1382 stop market”. If the price quote becomes 1382 bid, your order becomes an order to sell at market.

Here's a beneficial way to use Stop Market Orders. When you first enter into a position, you can enter a Stop Market Order to limit your losses. Then as prices move favorably, you change the Stop price so that it's effect is to protect accrued profits from slipping away. This is called a "Trailing Stop".

Stop Limit Order

These work in the same way as the Stop Market Orders except that your fill price is limited by the price you specify. That means you have to specify two prices: the stop price and the limit price.

A Stop Limit Buy Order becomes a market order to buy when the stop price you specify becomes part of the bid x ask quote. However, you will not be filled at any price higher than the limit you specify. For example, let’s say the current price is 1380 and you are willing to buy only if there is enough momentum to carry the price up to 1381 but you don’t want to pay any more than 1382. To do that, you enter an order to “buy at 1381 stop, limit 1382”.

A Stop Limit Sell Order becomes a market order to sell when the stop price you specify becomes part of the bid x ask quote. However, you will not be filled at any price lower than the limit you specify. For example, let’s say the current price is 1380 and you are willing to sell only if there is enough momentum to carry the price down to 1379 but you don’t want to sell for anything less than 1378. To do that, you enter an order to “sell at 1379 stop, limit 1378”.

Usually, Stop Limit Orders are used to enter into a new position. They are not usually used to exit with a loss or to exit to protect accrued profits because they might not get filled due to the limit you place on the order.

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Copyright 2006 Raymond T. Lee. All rights reserved.
Leisurely e-Mini Futures Trading
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