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Using Stop-Limit Order to Enter a Trade in Investing

selective focus photography of stop road sign

The stop-limit order is a type of exchange that buys high and sells low. Very similar to the standard stop trade, it uses an extra component, the limit, to restrict the maximum spending on a buy (and the minimum earnings in a sell). Investors at any discount trade websites should know how to use this exchange, as its utility is great. Following is some advice on using the stop-limit order to enter a trade in investing online.

Buy Stop-Limit Order in Investing

The buy stop-limit order purchases shares of stock once a certain price has been reached, as long as the set limit is not exceeded. It buys rising stock on behalf of the investor so that later, shares can be sold if the price continues increasing.

For example, if a traders is looking at a stock that is trading at $5 per share, he could set a buy stop-limit order with a stop price at $6 and a limit price at $6.50. This order will purchase shares once the stop price has been hit, only if they can be taken on at or below the upper spending limit, to prevent overspending if the stock gaps up.

Using the Stop-Limit Order to Enter a Trade in Investing

This order should be used to buy stock at a price that shows some increase, and designates a continuing increase in price. Any investor at an online trade site should set the stop price above market value (unless he or she wants shares at once, as long as they trade above a certain value, marked by the stop price), and the limit price at a point that specifies the most that the trader is willing to spend for shares of stock.

For successfully entering a trade with this investing exchange, stock will want to be bought at a price that is not too high, but is not so low that volatility, rather than actual upward momentum can explain the increase in price that has been experienced at the time of the buy.

It can be very hard to pinpoint the right price for the stop, but an online stock trader should use his or her best guess to set the buy stop price at the lowest value that signals actual upward momentum. If the trader is right, and stock is taken on early in its bullish movement, shares may be sold later, after the value has risen more, to secure favorable returns, making the whole trade a worthwhile investment.