Stop Orders

A stop order is an order that waits, inactive, until the market trades at a price you choose, called the stop price. Once that happens, it becomes a market order and fills at the next available price. Stop orders are best known as stop losses, which get you out of a trade that has gone wrong, but they are also used to enter trades when price breaks through a level.

The two kinds of stop orders#

A stop loss example#

The stop did its job in each case: it got you out. But it guarantees an exit, not a price. That is the trade off of a stop order. See Slippage.

A buy stop entry example#

A stock has repeatedly failed to rise above $45. You believe a break above $45 would start a new move. You place a buy stop at $45.10. If the price trades at $45.10, your order becomes a market buy and you join the breakout. If the breakout never happens, you never enter. See Breakout Trading.

Where to place a stop loss#

A stop belongs at the price where your trade idea is proven wrong, not at an arbitrary percentage:

• Below a support level or swing low for a long trade; above resistance or a swing high for a short. See Support and Resistance.
• Outside normal noise, using a measure like ATR (Average True Range) so ordinary fluctuations do not stop you out.
• Slightly beyond obvious levels, because many stops cluster exactly at round numbers and recent lows.

Then size the position so that hitting the stop costs only your planned amount. See Position Sizing and Stop Loss Strategies.

Stop orders and market hours#

On many stock brokers, stop orders are only active during the regular session, and they trigger based on trades on the primary market. A stock can fall through your stop in pre-market trading without triggering it, then open below it. Check your broker's rules for extended hours and for what price triggers the stop (last trade, bid or ask).

Stop vs stop limit#

A stop limit order turns into a limit order instead of a market order when triggered, so it will not fill below your limit, but it may not fill at all. For a protective stop, a missed fill can be far worse than slippage. See Stop-Limit Orders.

Common mistakes#

• No stop at all, hoping a losing trade comes back.
• Moving the stop further away after the trade goes against you.
• Stops too tight, inside normal noise, causing repeated small losses on trades that would have worked.
• Assuming the stop price is guaranteed. It is a trigger, not a promise.
• Mental stops that are never executed. If you will not act, use a real order.

Frequently asked questions#

What is the difference between a stop order and a limit order?#

A limit order waits for a price you would like to trade at. A stop order waits for a price where trading becomes necessary, then fills at market.

Why did my stop loss fill below my stop price?#

Because a stop becomes a market order when triggered, and in fast markets or gaps the next available price can be worse than the stop.

Should I always use a stop loss?#

Most traders benefit from always having a defined exit and a real stop order. Without one, a single large move can cause losses far beyond your plan.

Sources#

• U.S. Securities and Exchange Commission, Stop order