I think understanding these quite crucial and it is something that traders should not skip. It is hard to grasp for the majority of traders. I wanted to make it as simple as possible especially for beginner traders who are struggling with those. I will be explaining it in one example. Hope it helps! I will be happy to be corrected if I have any mistakes on it.As a general idea:
- A limit order is an open offer to sell at a certain price.
- A stop order is a trigger, which, if passed, means your position will be sold as soon as possible at the current market price.
- A stop limit order is a trigger, which, if passed, creates a limit order.
Let's assume you have some assets that currently at $5 and you decide that if it hits $5.50, you are want to sell. And that means you make a
limit sell order. Limit sell order basically means it is an order that will be automatically triggered at the first chance to sell at the price you set or above the price you have set ($5.50 for example).
On the other hand, assume that you also want to sell automatically if the price gets to $4.50 or lower so you want to prevent the possible losses. Limit sell order won't work in this case. Let's assume that you used a sell limit order for $4.50, so once you entered the order it will be instantly executed. Because and your position will be sold at $5.00 (current price in the example) which means $5.00 satisfies the condition of being equal to or better than the $4.50 limit price. A limit order is triggered so long as it can be filled at the limit price or better. So that is why a limit sell won't work for this case. We have
stop orders (Stop Loss) for this kind of situation. Stop order will trigger when a sell at the best available market price once the stop price has been reached. For instance, you set the stop loss to $4.50, once the market price passes below that, your position will be sold at the best available market price at that moment.
The difference between Limit orders and stop orders are; in a limit order, the limit price is just a threshold above which you will accept the trade, a stop order the stop price is a trigger: once the market price passes your stop price, then your position will be sold instantly to the highest bidder at that moment.
Now about
the stop limit, it basically combines both limit orders and stop losses. It requires that you specify two prices: the stop price and the limit price. If the market price passes the stop price, that will trigger the creation of a limit order within the limit price you have specified.
For example: As for the previous example, you believe that if the price gets low at $4.50, then you need to exit. However, you are definitely not willing to sell below $4.25.Because you are hoping that it will recover one day, so you make a stop limit order where stop price is $4.50 and the limit price is $4.25. When price gets low as $4.50 - the stop will be triggered and your limit will be created at $4.25. the stop price is the trigger to decide you want to make a sell offer, and the limit price is the lowest you are willing to sell for once the stop trigger actually happens.
Another way of you using stop limit order is, you again believe that if the price drops below $4.50, that is a sign that you should exit your position. But at the same time you believe that when price gets that low, there is a high chance that there will a bounce. So if the price gets low to $4.50, it will shortly make it back up to $4.75 before price crushes fully. So in this case you make a stop limit order with $4.50 stop price with a $4.75 limit price.
NOTE: These explanations are for selling. These types of orders exist for buying as well and it works the same but only vice versa.
