In stock trading, traders execute an order that becomes executable once a set price has been reached. This is know as stop order. A traditional stop order will be filled in its entirety regardless of any changes. In the current market price as the trades are completed.
The order that’s set at a precise value is named a limit order This is only executable at times when the trade can be performed at the limit price. Or when the trade can be performed at a price that is considered more favorable. Than the limit price then limit order is executable. The activity related to the order will be ceased. When a trading activity causes the price to become unfavorable in regards to the limit price.
With the combination of the two orders, the trader has much greater precision in executing the trade. Regardless of the price changes to an unfavorable position. A stop order is filled at the market price after the stop price has been hit. This can lead to trades being completed at less than desirable prices should the market adjust quickly. With the combination of it and features of a limit order. Trading is halted once the pricing becomes unfavorable, based on the investor’s limit.
For example, assume that ABC Inc. is trading at $40 and an investor wants to buy the stock once it begins to show some serious upward momentum. Let us assume that the investors have put in a stop-limit order to buy. With the stop price at $45 and the limit price at $46. When the price of ABC Inc. moves above $45 stop price. The order is activated and turns into a limit order. Provided that the order can be filled under $46, which is the limit price, the trade will be filled. If the stock gaps above $46, the order will not be filled.