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Learn the Difference Between a Stop Order and a Limit Order

In futures trading, order type matters. Markets, limits, and stops are three varieties of orders implemented to enhance strategic efficacy. In this blog, we will examine stop order versus limit order functionalities and how each can help you optimize your performance in the live market.

Gain Precision with Limit Orders

A limit is an order type where the associated buy or sell is to be executed at a specific price or better. Limit orders boost precision because they rest at market until filled at the trader’s desired price level. Limits are valuable tools for reducing slippage, promoting exact market entry, and establishing profit targets.

Futures markets can be fast-moving, volatile atmospheres. Limit orders let traders open new positions and take profits from positive trades efficiently. The basic functionality of limit orders is as follows:

  • New bullish trade: To open a new long position, a buy limit order is placed below price. When the buy order is hit, it is filled at the specified price or better.
  • New bearish trade: To open a new short position, a sell limit order is placed above price. When the sell order is hit, it is filled at the specified price or better.
  • Bullish profit targets: Placing a sell limit order above an active long entry provides an exact, profitable exit.
  • Bearish profit targets: Placing a buy limit order below an active short entry provides an exact, profitable exit.

One of the great things about being a modern futures trader is having access to the software trading platform. A robust platform takes the mystery out of the stop order versus limit order dichotomy through single-click order placement. Placing a limit order is straightforward: All you have to do is specify your order type as “limit” and click on a desired buy/sell price on the platform’s depth-of-market (DOM). Opening new positions or placing profit targets via limits really couldn’t be much easier.

Read tips and tricks compiled from the advice of experienced futures brokers in our e-book:Basic Training for Futures Traders

Managing Risk with Stop Orders

Like a limit order, a stop order is assigned a distinct price level where it rests at market until elected. However, the key difference between stops and limits is how the order is actually executed. When the price reaches the defined level, the stop order is immediately filled at the best available price.

Stop orders are ideal for managing risk in the live market. Here is a quick look at their functionality:

  • Bullish trade: To place a stop order on an active bullish position, a sell stop is placed below entry price. When the order is hit, the long position is liquidated.
  • Bearish trade: To place a stop order on an active bearish position, a buy stop is placed above entry price. When the order is hit, the short position is liquidated.

To illustrate the utility of the stop order, assume that Gretchen the gold trader is long one lot of December gold futures from $1,700. Gretchen decides to accept a maximum downside risk of $500 on the trade. Accordingly, a stop order is placed at $1,695―50 ticks from the bullish trade’s entry point. If price retraces to $1,695, the stop order will be activated and the bullish position immediately closed out.

When it comes to risk management, the stop order versus limit order comparison is moot. Stops provide the trader with a conditional-yet-immediate exit from the market; limits aren’t designed for this purpose. However, stop orders are subject to enhanced slippage due to being filled at the best available price.

Maximize Your Performance by Examining Stop Orders and Limit Orders

In reality, the stop order vs. limit order trade-off is only one strategic concern posed to active traders. Stop-limit, multibracket, OCO, and basic market orders are other valuable tools that may be used to optimize performance.

To learn more about the essentials of futures trading, check out Daniels Trading’s free guide Basic Training for Futures Traders. Featuring tips on disciplined trading, goal-setting, and general competency, it’s an informative tool for anyone venturing into the futures marketplace.

Basic Training for Futures Traders

Contact Daniels Trading

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Risk Disclosure

This material is conveyed as a solicitation for entering into a derivatives transaction.

This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.

You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the “risk disclosure” webpage accessed at at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.

About Daniels Trading

Daniels Trading is an independent futures brokerage firm located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading is built on a culture of trust committed to the firm’s mission of Independence, Objectivity and Reliability.

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