A trade order tells a broker when to enter or exit a position. You buy when conditions for entry are met and sell when you have to get out. You use pending orders for a sell when you do not want to sell at the current market price or when you prefer to sell when the price moves in a certain direction.
Limit order and stop order are some of the few pending order types used in order to minimize the risks associated with slippage – the difference between the expected price and the price at which it is filed.
Sell Limit and Sell Stop Difference
Sell Limit Order
It is a pending order to sell at the specified limit price or higher. If the currency or security for trading reaches the limit price, the limit order becomes a market order.
Purpose: You use a sell limit to set a higher price where you want to secure profit.
Reason: If the price reaches the limit price, there is an assumption that the price will continue to rise. By selling at the limit price or higher, profit can be guaranteed.
Example: Stock currently sells trading at $200; limit price at $210.
You are waiting for the right selling opportunity when the price reaches $210 or higher to sell for profit.
Sell Stop Order
It is a pending order to at the stop price or lower. If the currency or security for trading reaches the stop price, the stop order becomes a market order.
Purpose: You use a sell stop to set a price lower than the market price to minimize loss.
Reason: If the price drops at the stop price, there is an assumption that the price will continue to fall. By selling at the stop price, the loss is capped or minimized.
Example: Stock is currently trading at $200; stop price at $190.
You are waiting for the right selling opportunity but the price decreases and does not rise. If the value drops to $190, you sell to control or lessen incurring a loss.
Sell Limit vs Sell Stop
Both sell limit and sell stop are important orders you need to understand in order to make a decision when to sell. You have to remember the purpose and the reason for each sell order:
Sell Limit Order = at limit price or above market price; for securing profit
Sell Stop Order = at stop price or below market price; for minimizing loss
Knowing when to trade is important, but understanding how to trade is also significant. Recognizing the suitable order type for the circumstances will aid in locking profit and reducing loss.