What is the difference between a stop order and a limit order?
Limit and stop orders are often confused with each other as both are pending orders that instruct a broker to open or close a position when an asset’s price reaches a certain level. Buy limit orders instruct that a position is opened when the market price reaches a level lower than the current price, sell limit orders instruct that a position be opened when the market price reaches a level that is higher than the current market price.
Conversely, buy stop orders are entered above the current market and sell stops are entered below the current price.
Essentially limit orders attempt to get a better price than the current one, whereas stop orders are employed to take advantage of upswings and to minimise loss during downswings. Stop orders are essentially executed as market orders when price action triggers them, as such they can be subject to slippage and poor fills in certain market conditions.