Etrade trailing stop

Placing Limit and Stop-Loss Orders on E*TRADE

If youre new to investing and remember placing your first trade, you may have been wondering why there are multiple different order types to choose from and how they are all different. Limit and Stop-Loss orders (also commonly referred to as a Limit Loss or Trailing Stop order) are two of the most commonly used order types in trading. In this article, well go over what these order types are, when to use them, and how to place them in your Etrade account.

What is a Limit Order?

To put it simply, a limit order to buy a stock is similar to the logic you might use when you approach a seller in an open-air market where prices are negotiable. Lets say a souvenir at one sellers stand caught your eye and youve already determined in your head that youd be willing to pay $20 for it, but obviously youd prefer to pay less if the seller is okay with a lower price. Because you cant read the sellers mind you approach them and plan to first offer $10, and if they say no you will gradually increase your offer price up to a max of $20 until/if they say yes.

In the example above, youve essentially created a limit order in your mind to buy the souvenir with a limit price of $20, which means you would pay up to $20 for it, but certainly less if the seller agrees to a lower price. A limit order to buy stock on Etrade works the same way, as you can see in the example below. Ive indicated Im willing to pay the lesser of $100 or the market offering price (currently $105.38) for one share of MSFT, effective as soon as I place the order up until its either filled, is cancelled, or it expires.

A limit order to sell stock has the same logic, except its reversed. The limit price would be the lowest price youd be willing to accept for the shares you want to sell, but of course youd be happy to accept a higher price if there is a willing seller in the market.

What is a Stop-Loss Order?

A stop-loss order is another popular order type, and, as the name suggests, it is a way to minimize your losses (or alternatively lock in a portion of your unrealized gains) while holding onto the stock as long as it continues going up.

A Practical Example of a Stop-Loss Order

Lets say my limit order from the prior example to buy MSFT was filled, and although I expect the stock to go up, I want to limit my losses in case it drops by, say 5% or more. I can place the below trailing stop order with a % stop value of 5%, which will automatically sell my share at the market price if and when (and only if and when) the price of MSFT falls 5% from the current level.

The 5% loss is measured from the market price when you place the order, but the beauty of this order type is that it is constantly adjusted for market movement. For example, if MSFT rallies to $150 after I place my order my position will now be sold if the stock falls to $142.5, which is 5% from its new high. This effectively guarantees me a minimum gain of 42.5%.

The stop-loss order allows me to limit my losses while also allowing me to participate in uptrends as long as they continue without correcting to my stop level. Etrade also lets you specify your stop value as a dollar amount below the current price instead of a percentage. Although the stop-loss order type is most popular for sells, it can be used when buying stock as well if you wish for your buy order to be triggered only once the uptrend has proved its strength by rising by a specified amount.

E*TRADE Fee on Limit and Stop Limit Orders

E*TRADE is charging $0 commission for both Limit and Stop Limit orders for all stocks and ETFs.

E*TRADE Cost Comparison

Conclusion: Limit and Stop-Loss Orders

In conclusion, limit and stop-loss orders are two of the most commonly used and popular order types when trading stocks because they offer the investor more control over how they react to the markets price discovery process than standard market orders, where the investor is agreeing to pay whatever the current market price is.

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