How is it possible to go short using both sell stop-loss and stop-limit?
I want to buy shares in a company with a stipulation that the shares should be sold at an upper limit and at a lower limit (below original buy price). I.e. A stop-loss sell order in conjunction with a stop-limit sell order.
I've been told by my broker that with this setup it is possible to go short as both sell orders can be executed and therefore I can only do this with certain stocks.
Can someone explain to me how it is possible to go short with this setup?
An example: say I buy 20 shares in company X for a share. I want to set a stop-loss if the share price goes to and a stop-limit if it goes to . How would this short?
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The point in the other answer about volatility would apply in some cases, but your case is actually worse. Your stop-limit order is just a limit order in this case because you're trying to put the stop over the current bid/ask. (I'd be surprised if your broker even allows this order to be entered.)
This is from Capital One, which happened to be the first hit on Google when I looked just now for order entry:
Sell Orders: The Stop Price must be entered at least [CO].01 below the current Bid Price and the Limit Price must be equal to or less than the Stop Price.
That's because the stop-limit is not for taking a profit, like you seem to want, but an alternate way of implementing a floor. An example from the same site:
Sell Stop-Limit: Let's say a security is currently trading at .00. You'd like to sell the security if it reaches or goes below .00, but only if the security can be sold for .00 or more. You can place a Stop-Limit order by setting the Stop Price to .00 and the Limit Price to .00. If the security reaches or goes below .00, your order becomes a limit order with a Limit Price of .00.
The difference between stop-limit and stop-loss is that the stop-loss turns in to a market order whereas the stop-limit turns into a limit order. That means with the stop-loss, you're pretty sure to get execution at some price, but in a wild market it could be any price. With the stop-limit, you're basically saying "if it falls too fast to get out, I'll hold it and wait for it to come back."
www.capitaloneinvesting.com/main/help/topic.aspx?CategoryCode=CRTTORDTYP
Think about what happens if volatility took the stock below and then immediately over ; both your sell orders would hit and you would be short 20 shares. If volatility on the stock is high enough (think standard deviation) this could easily occur. Your problem is that your limit sell to take profit is not connected to the stop loss order and so will still exist to be executed if the market moves to that price. An OCO (one cancels the other) order would solve this problem, and I use them quite frequently to do so.
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