Which is more profitable in the long run, stop entry orders or limit entry orders?

Aloha Traders,

Hope you’re all doing well!

I’ve been entering trades with buy or sell stop orders, but have been toying with the idea of testing limit orders. With a stop order, the trade will be triggered if price continues in your desired direction. With a limit order, the level of which is behind price, the trade will be triggered if price reverses as a pullback (hopefully not hitting your stop loss) and then returns in the trend direction, giving you an earlier entry and a better R:R than the stop order as the stop loss would be at the same location in both scenarios.

Many seemingly emphasize that there is a good chance that your trade won’t be triggered with a limit order, more so than with a stop order. My guess is because the trader’s limit order level would be set farther back than a stop order’s level would be set ahead.

So here’s the deal: A limit order will trigger fewer trades than would a stop order, but will yield a greater R:R. Inversely, a stop order will trigger more trades than would a limit order, but will yield a smaller R:R.
Now, for the $64,000 question: Which would be more profitable in the long run, a stop order policy or a limit order policy?

Informed answers or considerations only, please.

Thank you,
Norm

I’ve never used a limit order for entry on the principle that it would only be triggered if price went in the opposite direction to what I planned for. A stop order on the other hand is only triggered when price moves to confirm the validity of my plan.

I can’t comment on the mathematics here - can’t argue as obviously a lower buy price for a long side trade means a better r:r - I just can’t get past the principle of abandoning a level of confirmation.

I don’t judge stops and limit order on their level of profitability. I use them when they are highly needed. For me, it’s just a tool that makes life a little bit easy. Last week, I set a sell limit order on a trade because price was not really good to sell due to my level of risk per trade. Price has moved passed my risk amount so I set a sell limit so I could sell at my risk amount. This coming week, I’m planning on setting a buy stop on BTC because I will be doing some work and I won’t have the chance to place an order when price reaches the level I want to buy. So for me, it makes life and trading easier.

Hi Tommor,

We’re on the same page for now. Perhaps testing and comparing will change my tune. Perhaps some new insight, perhaps from this thread, would help.

Talk about math? Look what I just did: “Perhaps” cubed. Perhaps my former English teachers would have flunked me for this. Perhaps.

Norm

[quote=“Regan64, post:3, topic:287559, full:true”]
I don’t judge stops and limit order on their level of profitability. I use them when they are highly needed. For me, it’s just a tool that makes life a little bit easy.

Hi Regan,

The explanations and examples you gave are valid. What needs to follow for me concerning profit orders is if they are superior to stop orders under any circumstances.

Thanks,
Norm

Hi, answer the questions contained in the built strategy and statistical advantage. You can build stop-order strategies that will be more profitable than limit-based strategies and vice versa. The choice of currency pair and time range is also important. Regards Greg

I can only speak from experience, but almost all of my profitable trading “systems” use stop orders.

Limit orders make more sense if you’re a big trader trying to accumulate a large position without adversely moving the market. Smaller (i.e. retail) traders are better able to exploit stop orders.

So if you’re trying to piggyback off a trend fueled by the big traders, then stop orders seem to be more suitable. Using a limit order won’t as much sense since you’re not trying to build a large position, which is the main benefit of limit orders.

Looking at it from another angle, losing retail traders like to pick tops and bottoms and trade against the trend. Picking a top or bottom is the equivalent of using a limit order as you’re waiting for price to reverse. This is a losing strategy. There’s quite a few studies showing how losing retail traders always trade against the trend.

Just my thoughts.

Hi Greg,

Thanks for the tip, but I don’t see any questions or strategy. Did you forget to include them? In my email notification of your post is a sentence in what looks like a Slavic language. Could that be what you’re referring to? If it is, I don’t understand it. Perhaps you can translate?

Thanks,
Norm

Profesor Pips answered my question in the above post as private messages to me. With his permission, I’m copying his responses here.

RESPONSE `1
Maybe this translation will be better;)

it all depends on your strategy making skills. You can build a strategy with stop orders that will be more profitable than a strategy using limit orders and vice versa. You also need to consider the currency pair and time range because limit order strategies are less profitable on some currency pairs and time ranges.

RESPONSE 2
Hi Norman, you can publish my answer on the thread, also I have little tips for you, stop orders work on most currency pairs and time intervals (statistically). So if you trade on major currency pairs, you can create strategies using stop orders with a high probability of success. Also, remember that stop orders involve price slips (when the price breaks the level and the stop order is activated). Regards Greg

Hi Kevin,

Thanks for your perspective.

That seems to be the consensus, and it’s drawing me closer to settling with stop orders.

I don’t understand how that works. Wouldn’t they adversely affect the market once their trade takes off and keeps going?

That’s a very interesting and helpful analogy.

“Just your thoughts” have been very helpful.

Regards,
Norm

With regards to “adversely affecting the markets”, stop orders consume liquidity. If your stop order gets triggered and there isn’t enough liquidity in the market to get filled, then you get filled at the next worse price and you begin to experience slippage. This is what I mean by “adverse affect”. This is a problem for the biggest traders who might trade billions of dollars. For these traders, limit orders are probably a better option. Instead of chasing liquidity away from them and experiencing slippage, they can wait for liquidity to come to them by using a limit order.

However, this isn’t much of a concern for small traders like us since we’re too little to consume liquidity in any meaningful amount. So stop orders are better for small traders than it is for big traders.

Heh, again these are all just my thoughts. There are situations when big traders may want to use stop orders or market orders, e.g. they may want to break a support or resistance level, or hunt for stop losses and trigger them. There are lots of shenanigans being played.

Hi Kevin,

I just did a little research to clarify the “consume liquidity” deal. Here’s what I found in a blog:

“Limit orders provide liquidity while market orders consume liquidity. A limit order cannot cause the price to move since it must be executed at a fixed price. A market order can since it is allowed to chase liquidity up/down the price ladder to ensure a fill. A limit order can stop a move in its tracks though.”

Well, this stuff is a bit over my head at this point. I’m just going to hang on to your and this guy’s explanations for now and save the digestion part for later. Need to turn to other things.

Many thanks for helping me come to a decision about stop vs. limit entry orders, and for dragging me a little further in my understanding.

Take care Kevin,
Norm

No worries. If you’re interested in learning about markets from an academic perspective, I strongly recommend this book, Trading and Exchanges by Professor Larry Harris. This is a university-level textbook, about 600 pages long, and really catapulted my understanding of trading. There’s no commercial fluff.

Thanks Kevin,

I truly appreciate your very helpful replies and suggestions.

Based on what already appears in this thread, I began a “Limit Order” file on my computer and did some brainstorming. In case you’d like to review it, I’m copying it here - but FOR THE SAKE OF THOSE STILL TRYING TO UNDERSTAND ALL THIS, PLEASE DON’T TAKE THIS AS GOSPEL! (TAKE THE GOSPEL AS GOSPEL.) I’M STILL TRYING TO PULL THIS ALL TOGETHER. Here it is:

                     **MY EINSTEINIAN THOUGHT EXPERIMENTS**

Market orders move markets (either in miniscule amounts or gigantic amounts) because trade volume is added in a buy if the software has to search upwards to fill the order, and (taken away?) in a sell if it has to move downward to fill the order.

Stop orders turn into market orders on execution, so they have the same effect as market orders.

Limit orders are filled ONLY at the requested price (or not at all), so they do not move price at all – BECAUSE PRICE IS ALREADY AT THE LEVEL THE TRADER REQUESTED.

                     STILL NEED TO THINK THROUGH

“A limit order can stop a move in its tracks.” Because, if it’s large enough, there won’t be enough opposing buyers or sellers to fulfill it for a while?

So why are limit orders beneficial to the big guys and not to the little guys?

Thanks for the tip on the book. Looks good. Will look into it.

Thanks again,
Norm

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Hey Kevin,

I ordered a brand new copy for $21 total from Abe Books, first listing here: https://www.bookfinder.com/search/?ac=sl&st=sl&ref=bf_s2_a1_t1_1&qi=42UqhGvRXoXoKtCKcS3VTtSLQHY_1497963026_1:4:15&bq=author%3Dlarry%20harris%26title%3Dtrading%20and%20exchanges%20market%20microstructure%20for%20practitioners

I think I’ll have to swallow hard before I start reading!

Thanks again,
Norm

You would try everything and then decide