Want to open a position but hesitate whether the price will go in the right direction? Want to know how to avoid losses in such a situation? Below, we will point to two automated trading tools that will come in handy and will teach you when to use them for the best results.
Most online broker services offer an extensive variety of automated tools for controlling loss risks. Yet, in this overview, we want to focus on the two of them that arise most questions among beginners. The problem is that they work similarly, so it may be complicated to choose which one to apply in a given situation.
First, let us provide their short descriptions.
- Stop loss. When one activates such an order, one specifies a minimum or a maximum rate, below or above which an asset is sold or purchased automatically. If you want to sell some stock and expect its price to grow, but have certain doubts, you can set a point below which it will be sold, and the deal will be closed. As a result, you will control your financial risks.
- Stop limit. Such a deal is also automatically activated (or opened) only when the price of an asset falls or rises to the certain point.
Now, let us compare stop loss vs stop limit orders. So, the first instrument is applied to close a trade, which is already opened, at a current price to prevent higher losses, but it cannot make any influence on potential profits. While the second one allows a trader to enter a deal at a price, which is more advantageous for him, so it is used to reduce wastes and to increase profits in high volatility conditions. Thus, the first type of order is suitable both for instant and pending execution, while the second one is always pending. Also, one must take into account that only stop limit deals allow specifying an expiration date. You must keep in mind that the market situation can change at any moment, and it may turn out that the price specified is not profitable anymore. Then, you will need to open a new order with altered parameters.
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In sum, stop loss orders are aimed at protecting you from excessive financial wastes in case the market trend turns wrong, while stop limit ones are designed for executing trades only if the market situation gets advantageous for you.