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The thread on emini stop slippage during the Fed announcement kind of
highlighted the difference between stop orders (becomes market order when
stop price is hit) and stop limit orders (becomes limit order when stop
price is hit). Price may be an actual trade in some markets or merely the
bid/ask in other markets. I thought it might be useful to initiate a
discussion of the tactical use of such orders.
1) stop orders - this is what I use for stop loss orders. If the price is
touched I have made a mistake. This is a "get me out" order with no
conditions i.e. slippage is secondary to exiting the position.
2) stop limit orders - this is what I use for conditional entry where I want
my order already working should a specific price action occur. If the price
is touched, enter the market as long as the price does not incur slippage
beyond my limit e.g. buy at 1350 stop with 1352 limit says I want to be long
if the market rallies to 1350 as long as slippage is $2.00 or less.
There is an argument to be made for using stop limit orders for stop loss
orders, which is that if the slippage exceeds a certain amount, it may be
possible to trade out of the position more favorably by waiting for a
retracement of the move which triggered the stop. The arguments against this
are that the exit becomes discretionary under circumstances where a bad
trade has been confirmed and price may not in fact retrace to the desired
exit point.
Earl
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