The Stop Limit is a feature that allows traders to make profits with correct forecasts. In the last lesson we explained what Stop Loss is for limiting losses and automatically closing the position. In this lesson we will see what Stop Limit is. It has a similar function to Stop Loss, but with a difference.
In fact, the difference between Stop Loss and Stop Limit is as follows:
- The Stop Loss allows establishing a maximum loss limit so that the position is automatically closed
- Stop Limit allows the trader to set the profit wanted, and then the position will be closed automatically
The Stop Limit is, in fact, a “maximum limit” for profits, but it is set by the trader himself. You can evaluate this feature by opening a demo account with IQ Option from here.
Let’s make an example to better clarify what it is about.
How does the Stop Limit work?
Let’s say we’ve analyzed an upward movement in Apple stock. To take advantage of this forecast, we must open a “Buy” position, to obtain profits proportional to the rise in prices. This feature is available in all trading platforms.
If this forecast turns out to be correct, our profit/loss balance will increase positively.
Suppose that, in case of a rise, we want to earn up to a $100 limit on our trade and when this profit has been reached, the platform will automatically close the position. For that, we will have to set the Stop Limit at $100.
Automatic trading, not to be stuck to the computer
Trading could be stressful. Following all the trades can be tiring and you may not have time to do it.
The Stop Limit function, Stop Loss and other stops allow you to perform automatic trading without having to be there at all times.
If you reach a certain level of profit, the platform will close the trade and you will have $100 more in your account.
What happens if the price doesn’t reach the established quote?
If a price does not reach the level established with the Stop Limit, it will not be able to go into action. The position would therefore remain open.
For example, if you leave a position open with a Stop Limit of $100, even if your profit reached $99.99 for the current trade, the Stop Limit would not be activated. This Stop is very precise and only comes into effect when it reaches the established rate.
Therefore, if a position reached 99.99 and returned to 20 or -20 or -99, it would not have been activated even if it was a single penny short.
For this reason, we recommend that you choose carefully the values you set in the Stop Limit.
Also, always set the Stop Loss.
Practical example for setting the Stop Limit
In our example, we will use the Plus500 demo account, which includes the Stop Limit among its many easy-to-use features .
After choosing an asset to trade, click Buy or Sell according to your forecast. Buy to win by investing in upward bets, Sell to win by investing in downward bets.
Let’s assume that you predict that Tesla shares will rise in the next few hours. To open an upward position, click “Buy”. We will then buy “Long” CFDs, to gain in proportion to the changes in the CFD rates on Tesla shares.
When you click on “Buy”, the order window will open where you can set the desired Stop Limit.
As you can see, we checked the “Close to Profit” box and pressed “+” until a profit amount we considered satisfactory appeared.
Remember that you can change the amount of shares to trade, as well as set up Stop Limit, Close on Loss and other advanced features such as “Peak Stop” and “Buy only if the price reaches”.
From today, you can start trading CFDs through a demo account with this world leading platform, authorized by CYSEC