What Is a Stop Limit Order?

1. **Stop Price**: This is the trigger price. If you are placing a stop-limit order to sell, your order will be converted into a limit order (not a market order) once this price level is reached or passed. Conversely, if you are looking to buy, the stop price triggers the conversion when the price climbs up to that point.

2. **Limit Price**: After the stop price triggers the conversion of the stop order into a limit order, the limit price determines the worst price at which you are willing to buy or sell. Your order will only execute at this price or better.

The primary benefit of a stop-limit order is that the trader has precise control over when the order should be filled and at what price. However, the trade-off is that, unlike a stop-loss order that converts to a market order and will execute at any available price once the stop is reached, a stop-limit order might not execute if the price quickly surpasses the limit price and never returns to that level. It thus provides a level of protection on the price, but it does not guarantee the execution of the order.

Stop-limit orders are used widely in various financial markets including stocks, futures, and foreign exchange markets. Understanding how to properly set the stop and limit prices relative to the market conditions and your risk tolerance is integral to effective use of this type of order.

Pros and Cons of Stop Limit Orders

You've provided a good summary of the advantages and disadvantages of stop limit orders. To add some context for those less familiar:

Stop limit orders are a type of order that investors can place with their brokerage to buy or sell a stock once it reaches a certain price, known as the stop price. When the stop price is reached, a limit order is then placed to buy or sell the stock at a specific limit price or better.

Here's a bit more detail on each of the pros and cons you mentioned:

**Pros:**

1. **Control over execution price**: The limit order component of a stop limit order ensures that the trader does not pay more (or sell for less) than a predetermined price. This can protect the trader from the market's rapid price fluctuations that might happen right after the stop price is hit.

2. **Risk management**: Traders can use stop limit orders to automatically sell a position if the market moves against them, potentially preventing significant losses if the investor cannot monitor their portfolio or react to market changes in real time.

3. **Flexibility**: Stop limit orders can be used by traders who are not able to monitor their positions throughout the day. They can place these orders to manage entry and exit points without needing to be present at a specific time.

**Cons:**

1. **Complex execution**: Since stop limit orders become active only when the stop price is reached and are executed only at the limit price or better, there can be a gap between expectation and reality. If the stock price moves quickly past the limit price, the order may not be executed at all.

2. **Liquidity**: If a stock is not very liquid (i.e., not many people are buying or selling it), there might not be enough market activity to execute the limit order part of the stop limit order once the stop price is reached.

3. **Timing**: In a highly volatile market, the price of an asset can move rapidly. If the stock gaps down or up past the limit price, the order will not be executed, and the trader may remain in a position that they wish to exit, or they may miss an entry point.

It's important to understand that stop limit orders are not a guarantee of execution. For volatile stocks or during periods of high market volatility, stop limit orders can often lead to missed executions if the conditions for both the stop price and the limit price are not met. As a result, they may not be suitable for those who prioritize execution over price certainty. Traders and investors need to weigh these pros and cons against their trading strategy, risk tolerance, and the specific market conditions they face.

The Bottom Line

It looks like you're describing two different types of stop limit orders which are tools traders can use to manage their positions in the market:

1. Buy Stop Limit Order scenario:

A trader has a short position in a security, meaning they have borrowed shares and sold them, betting the price will go down. To manage risk and to prevent excessive losses if the price were to rise instead, they use a buy stop limit order.

- Stop Price: The trigger price ($50 in your example) is set above the current market price. If the security's price rises to this level, the order is activated.

- Limit Price: Once the stop price is reached and the order is triggered, it becomes a limit order with a specified limit price ($51 in your example). The limit order will only execute at the limit price or better. So in this case, the order will only be filled at $51 or lower, preventing slippage beyond that price.

This type of order helps to set a cap on the amount the trader will pay to cover the short position and limit their losses.

2. Sell Stop Limit Order scenario:

A trader has a long position in a security, meaning they own shares and will profit if the price goes up. To protect these potential profits, they use a sell stop limit order.

- Stop Price: The trigger price ($70 in your example) is set below the current market price. If the security's price falls to this level, the order is activated.

- Limit Price: Once the stop price is reached, the order becomes a limit order to sell with a specified limit price ($69 in your example). The limit order will only fill at the limit price or higher, which ensures the trader can lock in profits at a specified minimum price.

Both types of orders are used to specify a trading action once certain price conditions are met, combining the features of stop orders and limit orders. However, it's important for traders to remember that stop limit orders are not guaranteed to execute. If the market price moves rapidly through the specified stop and limit prices, or if there's not enough liquidity in the market at those price levels, the order may not fill.

In your examples, assume the stop and limit prices are very close to each other, there's a higher chance that market volatility could lead to the order not being filled, or only being partially filled. The effectiveness of these orders will depend on the market conditions and the security's liquidity and volatility.

Stop Limit Order vs. Stop Market Order

You have correctly described the differences between a stop limit order and a stop market order (also known as a stop loss order). To recap and elaborate a little bit:

1. **Control Over Execution Price**:

- **Stop Limit Order**: Allows a trader to set a stop price and a distinct limit price. The order only executes within that predefined price range. This can prevent execution during periods of high volatility where prices may gap beyond the desired level.

- **Stop Market Order**: Is executed at the best available price after the given stop price has been reached. It does not guarantee a price, only that the order will be executed, which could be at a significantly different price in fast-moving markets.

2. **Potential for Execution**:

- **Stop Limit Order**: Might not be executed if the limit price is not met. If the market price gaps past the limit price or if the price never comes back to the limit price range, the order will remain unfilled.

- **Stop Market Order**: Once the stop price has been reached, the stop market order turns into a market order, making it virtually guaranteed to execute, albeit at a potentially unpredictable price.

3. **Risk Management**:

- **Stop Limit Order**: Provides a cap on the execution price, which can be used to manage risk in terms of not paying more or receiving less than a certain price. It is especially useful in less liquid markets or in stocks with wide bid-ask spreads.

- **Stop Market Order**: Protects against losses by ensuring that the security is sold (or bought in the case of a buy-stop order) once the stop level is reached, but does not protect against slippage.

4. **Complexity**:

- **Stop Limit Order**: Requires more planning and understanding of market conditions. A trader needs to anticipate the likelihood of the price fluctuating within the range of the stop and limit prices.

- **Stop Market Order**: Simpler to execute because it involves setting only one price, the stop price, after which it becomes a market order.

Choosing between these types of orders will depend on the specific circumstances of the trade, including market conditions, the particular asset being traded, volatility of the market, and the trader's own risk tolerance and strategy.

It's important for traders to review their orders in the context of their trading strategy and to consider any changes in market conditions that might affect their order types and settings. Advanced traders may use a combination of different order types to tailor their trading strategies under various market conditions.