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Limit vs Stop Orders

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  • Which one is better.
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  • Post #1
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  • First Post: May 18, 2008 9:59pm May 18, 2008 9:59pm
I just had a thought about this.

why people use limit orders and risk the drawdown trading against the current trend istead of letting the price go through and entering the trade upon retracement/reverse by setting the stop orders..

For example

EUR/JPY - set Sell limit 161.00 when the price is 160.00,
how would it be better then let the price go all the way it want to 163.00 then enter short when price come back down.

Which are better to use ?
each one has his own uses

ex.
Limit orders when you trade retracement and
Stop orders when you trade breakouts

also in limit orders you set Your price or your max price, ex. you want to long at a better or cheaper price than the current

there is no one better than the other

also limit orders isnt a trade against the trend!!
my long time opinion is that the LIMIT order is the ONLY order a trader should use. in some extreme circumstances you might need a market order (aka stop order) such as when you absolutely need to exit a position at a certain point when you will not be around to place your limit order.

using a limit order has nothing to do with the direction of your trade. it does not mean you are trading against the trend. you can even use a limit order when the market is breaking out... for instance, if you are buying a breakout, put your limit price ABOVE the best offer. it will execute immediately (like a market order) but also gives you protection from slippage beyond your limit price. btw, some of the less sophisticated brokers will consider this an out-of-bounds order, in which case you should put the limit price exactly at the best ofer and it should execute right away (unless your broker is a joke).

im amazed at the confusion that surrounds order types. most of it is due to these stupid brokers coming up with childish names for their order types. for the record, there are only two major order types... limit and market. everything else is a derivate of one of these. if you dont understand this concept, i suggest not making another trade until you completely understand it! once you realize there are only two order types everything else should fall into place. oh and btw, forget what your broker calls the order types, most forex brokers come up with custom names (not sure why they do this). you have to figure out which is the market and which is the limit, and which are the derivatives.
Relax and be happy.
Quoting merlin
im amazed at the confusion that surrounds order types. most of it is due to these stupid brokers coming up with childish names for their order types. for the record, there are only two major order types... limit and market. everything else is a derivate of one of these.
Whoa, whoa hold on. That's not the case in the equities, fixed income or option markets. There is a very fundamental conceptual difference between market, limit AND stop orders. The only order type that is a derivative of these is a stop-limit. These differences are tested on the Series-7 General Securities exam and are recognized and enforced by the NYSE and other exchanges.

It's the FOREX retail market that is confused, since brokers call these orders all kinds of things. Oanda confuses the idea of stops and limits, and I'm sure there are many other examples.

Leaving FOREX aside, since those brokers don't answer to the NYSE, NASD, FED, MSRB and all the other regulatory bodies, here are the actual meanings of the various order types (in terms of price instructions; there are other parts of an order like Time In Force and Special Instructions, etc.)

1. We all know what a market is I'm sure. It simply gets executed at the next available price.

2. A LIMIT order is one that is generally placed on the "better" side of the market, and it is ALWAYS the trader's intention to get the limit price OR BETTER on such an order. So buy limits are placed below the current market price and will ONLY be filled at or below the limit price. Sell limits are placed above the current price and will only be filled at or above the current price.

The NYSE in particular is adamant about the placement of these orders on the right side of the market. If IBM is trading at 81, and you try to place a buy limit order at 82, guess what happens? Your broker's order desk kicks the order back to you, because a buy limit must always be below the price. I think you can get away with placing them on the wrong side on the OTC (NASDAQ, OTCBB and Pink Sheets).

Anyway the concept behind a limit order is "get me this price or better." These orders are used by contrarians who are looking to buy when price goes down and sell when it goes up. For a long position, buy limit orders are for bargain hunters and sell limit orders are for profit takers.

3. Stop orders are the exact opposite of limit orders. These are generally placed on the "worse" side of the market and it is the trader's intention to get into the market in the direction of the momentum. Buy stop orders are placed above the market and sell stop orders are placed below the market.

The idea behind a stop order is "get me in at whatever price I can get, but NOT BEFORE the market starts moving my way." So the stop order is "triggered" when the price moves to the stop level, and it turns into a market order at that time. You can also specify that you want the stop to turn into a limit order once triggered, and this would be called a "stop-limit" order.

Assuming a long postion, a buy stop order would be for "bandwagon buying" in the direction the upward momentum. A sell stop order (commonly called a stop loss, although this is not an officially recognized term in the general securities markets) would be for panic selling.

So for a typical long postion in the securities markets (which FOREX is NOT), we have:

Buy limit order (for bargain hunting)
Sell limit order (for profit taking)
Buy stop order (for bandwagon buying..."to da moon!!")
Sell stop order (for panic selling..."get me OUT!!")

At Fidelity, when training new brokers to take the exam, we used to use an acronym to help them remember which orders were above and below the market. The acronym in words was "Slobs Bless," but we wrote it like this:

SL o BS
BL e SS

This reminds us that Sell Limits and Buy Stops are placed above the market, and Buy Limits and Sell Stops are placed below the market.

Basically, no matter whether you're long or short, limit orders are a contrarian tactic (sell when it's high and buy when it's low) and stop orders are a trend following/momentum tactic (buy when it's going up and sell when it's going down).

Hope this helps!



And I love the new smileys!!!!

:nerd:
Merlin "Limit Order" Jeffries. ....I always remember that now. lol

I agree with capitalist88s argument. ....the new smilies are great! ......oh hang on, .... we're talking about order types aren't we.

Caps right on technical grounds. ....The way I learnt it too. I agree with Merlin on Limit orders too. Buying and selling "At Market" is risky. Stop orders where you can give slippage limits are handy.

Didn't vote. Both have their uses.

.
Bundy's status today: "Waiting..."
Yes, I was asking
the Buy Limit & Sell limit orders as its used by contrarian traders,
and Buy Stop & Sell Stop to enter market as it is used by breakout traders.
Quoting Syafi
Yes, I was asking
the Buy Limit & Sell limit orders as its used by contrarian traders,
and Buy Stop & Sell Stop to enter market as it is used by breakout traders.
I voted for stops because what I do is place sell stops under the market as the price is rising, so then when it turns back down they start to get hit. I do the opposite when price is falling. Then I'm positioning a series of buy stops above the market for when it turns back up.

Oanda calls these "limit orders" though, which makes anyone from the securities markets do this >>>> Silly FOREX brokers!
Quoting capitalist88
I voted for stops because what I do is place sell stops under the market as the price is rising, so then when it turns back down they start to get hit. I do the opposite when price is falling. Then I'm positioning a series of buy stops above the market for when it turns back up.

Oanda calls these "limit orders" though, which makes anyone from the securities markets do this >>>> Silly FOREX brokers!

This mean you still get to go in your direction against the original trend without risking any drawdown, compared to limits that would cost a drawdown.

with the possibility of losing the opportunity to enter market if the price dont go away too much before setting the stop orders.

This is exactly what I am looking for, and how you feel using it compared to limits ?
How many pip you would normally let the price move before setting the Stop orders to get into the market at your price, (which currency pairs so i can see the daily range and set up mine accordingly )

Thanks
Quoting Syafi
This mean you still get to go in your direction against the original trend without risking any drawdown, compared to limits that would cost a drawdown.

with the possibility of losing the opportunity to enter market if the price dont go away too much before setting the stop orders.

This is exactly what I am looking for, and how you feel using it compared to limits ?
How many pip you would normally let the price move before setting the Stop orders to get into the market at your price, (which currency pairs so i can see the daily range and set up mine accordingly )

Thanks
I have a whole system for setting these orders which is in my journal. I only use EUR/JPY right now, and I keep a buffer of at least 100 pips before placing the next order. I keep the orders 50 pips apart. The system I used to decide when and where and how much is too long for this thread, but it's all in my journal.
  • Post #10
  • Quote
  • Edited 6:06pm May 20, 2008 5:54pm | Edited 6:06pm
Quoting capitalist88
Whoa, whoa hold on. That's not the case in the equities, fixed income or option markets. There is a very fundamental conceptual difference between market, limit AND stop orders. The only order type that is a derivative of these is a stop-limit. These differences are tested on the Series-7 General Securities exam and are recognized and enforced by the NYSE and other exchanges.
capitalist i know you are well versed on the markets and have a good grip on the issue at hand... but you are missing a critical element of the puzzle!

i say again... THERE ARE ONLY TWO MAJOR TYPES OF ORDERS... limit and market. everything else is a derivative of one of these two.

you say that a "stop" is a third major order type... not true! a "stop" is a derivative, it can be either stop-market (usually called plain "stop") or a "stop- limit". the word "stop" means that the order will be triggered when the price reaches a certain point. so for a stop-market, if the price reaches my "stop price", a market order will be triggered.

to further illustrate this point, look at the IB webpage http://www.interactivebrokers.com/en...&ib_entity=llc. their definition of a stop order is "A Stop order becomes a market order to buy or sell securities or commodities once the specified stop price is attained or penetrated."

naturally, a stop-limit order will trigger a limit order when a certain price is reached. this is why i keep harping on the fact that traders MUST understand there are only two major order types... knowing this helps you understand what all the other orders do!
Quoting capitalist88
2. A LIMIT order is one that is generally placed on the "better" side of the market...So buy limits are placed below the current market price and will ONLY be filled at or below the limit price. Sell limits are placed above the current price and will only be filled at or above the current price.
not true!! i frequently place buy limit orders ABOVE the best offer, or a sell limit order below the best bid. obviously it gets filled right away (like a market order) because im willing to buy at a higher price than the cheapest person is willing to sell for. instant execution (without slippage past my limit price) is why i do this in the first place.

you are making a limit order more complicated than it needs to be. limit order means only 1 thing... "give me this price or better". look at the IB defition of a limit order..."A limit order is an order to buy or sell a contract at a specified price or better."
Quoting capitalist88
I voted for stops because what I do is place sell stops under the market as the price is rising, so then when it turns back down they start to get hit. I do the opposite when price is falling. Then I'm positioning a series of buy stops above the market for when it turns back up.

Oanda calls these "limit orders" though, which makes anyone from the securities markets do this >>>> Silly FOREX brokers!
oanda calls them limit orders because they ARE limit orders you are getting confused between stop and limit orders, because you havent come to grips with the fact that there are only two major order types LOL

capitalist, when someone as smart and experienced is confused on this issue, i have to believe not many people truly understand their order types. does anyone else on this forum understand there are only market and limit orders??
Relax and be happy.
  • Post #11
  • Quote
  • Edited 6:10pm May 20, 2008 5:58pm | Edited 6:10pm
to further illustrate my point that there are only market and limit orders, i challenge anyone to tell me about an order type that thier broker offers. no matter what your broker calls it, if you tell me how it works i will show you how it's a market, limit, or derivative of one of them.

btw, dont forget to ready my now famous "bottle of water" analogy. LOL
Relax and be happy.
Quoting merlin
to further illustrate my point that there are only market and limit orders, i challenge anyone to tell me about an order type that thier broker offers. no matter what your broker calls it, if you tell me how it works i will show you how it's a market, limit, or derivative of one of them.

btw, dont forget to ready my now famous "bottle of water" analogy. LOL
Hi Merlin,

First, I must agree with the fact that all orders are derivatives of the market or limit orders, BUT are you saying that I can simplify my trading by using only market and limit orders? Won't each market and/or limit order need aditional market/limit orders placed as stops and take profit levels? Not to mention the task of triggering each order in sequence with its corresponding 'parent' order.

What am I missing? Please keep the list small. I like simple.:nerd:
Quoting merlin
................ "A Stop order becomes a market order to buy or sell securities or commodities once the specified stop price is attained or penetrated."

naturally, a stop-limit order will trigger a limit order when a certain price is reached....................
.

Man you're a Genius

It is so true.
I'm hearing you Merlin.

A good buy stop order would be comprised of a conditional limit order ...etc.

I understood this. I've got the other descriptions hammered into my head and always call them by those names, but most experienced traders I'm sure would understand exactly what you said. How could anyone who has traded for a reasonable time and not understand "at market" vs Limit?

I'm trying to never use "at market" orders, even considering writing scripts to create my own derivative orders. ...Mainly after your past stances on the subject and something Phil McGrew once said.

I suppose when we use at market orders it's pretty much a panic buy/sell. Gotta get in.
Bundy's status today: "Waiting..."
Quoting merlin
not true!! i frequently place buy limit orders ABOVE the best offer, or a sell limit order below the best bid. obviously it gets filled right away (like a market order) because im willing to buy at a higher price than the cheapest person is willing to sell for. instant execution (without slippage past my limit price) is why i do this in the first place.

I understand all the post except this

when you place a buy limit order or a market order above the best offer, your order will executed as you said @ market or @ the current best offer and this isn't a breakout trade we talk about, we means when the market executing at the point we want specially when I'm away

if I see the current price @ the point which I want to break I will buy by market

is this right??

and I understand what you mean by the main two types
I do this all the time...and its good.
exactly as what Merlin trying to say.
Attached Image
Quoting merlin
to further illustrate this point, look at the IB webpage
Forget the IB webpage. IB doesn't get to pass or fail you for the General Securities Exam. What I went over in my first post was the actual curriculum regarding order types directly from the licensing prep materials (including the "SL o BS BL e SS" trick). You can use any other definition you want, but as we used to tell the students, you can also fail the test and go work at Wendy's. Here's the actual definitions from the NYSE which, as an SRO for the brokerage industry is a source for the exam's body of knowledge:

http://www.nyse.com/equities/arcaedg...538334929.html

Quote
their definition of a stop order is "A Stop order becomes a market order to buy or sell securities or commodities once the specified stop price is attained or penetrated."

That's all correct. There are market orders, limit orders, stop orders and stop-limit orders. Stop orders, when triggered, become market orders. Stop-limit orders, when triggered, become limit orders. But the basic difference between a plain LIMIT order and a STOP order is that a limit order has no triggering threshold. It's in force immediately. I'll get back to that in a minute.

Quote
not true!! i frequently place buy limit orders ABOVE the best offer, or a sell limit order below the best bid.

Not on the NYSE you don't unless they've relaxed that restriction. In the retail FOREX or futures market you can because those aren't securities markets. You can also get away with this on the OTC markets as I mentioned previously.


Now let me illustrate why a stop order and a limit order are fundamentally different. AMZN right now is trading at about 81. If you put in a LIMIT order to buy it at 75, the order won't fill right away (and may never fill at all). If, however, you put a STOP order in to buy at 75 the order will fill immediately at 81 because a buy stop will fill at any price at or above the trigger.

There is a HUGE difference ($6/shr) in outcomes (which can cause a customer to call up swearing their head off) when a person doesn't understand the fundamental difference between a stop order and a limit order.

Again, this doesn't apply to FOREX, where brokers call these things any old thing they want. But in the real securities markets, there is a very precise regulatory definition of what these types mean.
for my size....no problem to put limit orders at best bid and best ask. always filled.
Quoting capitalist88
Not on the NYSE you don't unless they've relaxed that restriction. In the retail FOREX or futures market you can because those aren't securities markets. You can also get away with this on the OTC markets as I mentioned previously.
Is/was that true?? ...wow. That's amazingly restrictive.

So in a fast moving market you're saying you have to cross you fingers that the spread doesn't widen at the moment you place your (forced to use) "buy at market" order?? ...

On the ASX I'm sure you can place Limit orders over the offer. It's been a while since I bought or sold shares directly, though I'm 99% sure.

If Amazon is $81 and I want to buy right now, I'd much rather place a limit order at $82 than a Buy @ Market . Any higher and it's not worth my interest. Buy - Limit @ $82.
Bundy's status today: "Waiting..."
Here's a quiz:

IBM is trading at 90, and I see a resistance level at around 94. I want to buy IBM if AND ONLY IF it goes above that resistance level. So I'd like to buy it if it ever reaches 94.50. Also, I want to be sure that my order fills once the price reaches this level.

What kind of order do I place?

A. Market order

B. Limit order at 94.50

C. Neither of the above will work so there must be a third kind of fundamental order type.

D. Stop order at 94.50

E. Stop-limit order at 94.50

F. Both C and D

G. Both C and E
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