what is a stop order 
a stop order is one of the three main order types you will encounter in the market stop market and limit a stop order is always executed in the direction that the price is moving for instance if the market is moving lower the stop order is set to sell at a pre set price below the current market price alternatively if the price is moving higher the stop order will be to buy once the security reaches a pre set price above the current market price there are several types of stop orders that can be employed depending on your position and your overall market strategy here s a review of the various types of stop orders and how they function relative to your trading position in the market types of stop ordersthere are three types of stop orders you can use when trading stop loss stop entry and trailing stop loss a regular stop loss order is recommended for any live position a stop loss order is just what it means it stops losses the stop loss order will remove you from your position at a pre set level if the market moves against you stop loss orders are critical when you can t actively keep an eye on the market and it s recommended to always have a stop loss order in place for any existing position for protection from sudden market news data releases and the like for example let s say you re long you own it stock xyz at 27 and believe that it has the potential to reach 35 however at price levels below 25 your strategy is invalidated and you want to get out you would then place a stop order to sell xyz at around 25 or slightly lower to account for a margin of error a stop entry order is used to get into the market in the direction that it s currently moving for example let s say you have no position but you observe that stock xyz has been moving in a sideways range between 27 and 32 and you believe it will ultimately move higher in this case you could place a stop entry order above the current range high of 32 say at 32 25 to allow for a margin of error to get you into the market once the sideways range is broken to the upside now that you re long and if you re a disciplined trader you ll want to immediately establish a regular stop loss sell order to limit your losses in case the break higher is a false one continuing from the scenario above xyz has broken above the range top at 32 and your stop has been triggered at 32 28 stop orders use the best available market price making you long in a rising market the price keeps increasing and hits your first price objective at 35 you may now want to protect your profits in case the market reverses lower you can accomplish this with a regular stop loss placed at say 34 that means you will lock in around 1 72 on the trade 34 00 32 28 1 72 if the market turns around in this case you used a stop loss order to protect your profit instead of limiting your loss some online brokers offer a trailing stop loss order functionality on their trading platforms these orders follow the market and automatically change the stop price level according to market movements you can set a particular price distance the market must reverse for you to be stopped out to preserve your profits you can specify 0 50 for the stock trade meaning that the market price currently at 35 must touch 34 50 for your stop loss order to be triggered however if the price continues to move higher the trailing stop will rise with it always remaining 0 50 from the highest high the price has reached so let s say the price continues to move higher from 35 and reaches 36 75 your trailing stop will have followed the price increase and will now be 36 25 36 75 0 50 36 25 trailing stops are a great way to protect profits and stay in a position until the market has shown that it has actually reversed advantages and disadvantages of stop ordersexecution guaranteeadditional controllosses can be limitedshort term fluctuation riskslippagethere are more advantages to using stop orders than disadvantages because they can help you avoid or minimize your losses if the market doesn t act in your favor this is because you have an execution guarantee where the order you placed will execute whether you re monitoring prices or not this gives you an additional measure of control over when you buy or sell a security without it one phone call could distract you for long enough that you could suffer a substantial loss depending on the market you re trading in because you ve placed a stop order you ve taken a precautionary measure that can limit your losses or prevent them entirely one of the most significant downfalls to stop orders is that short term price fluctuations can cause you to lose a position for instance if you placed a stop expecting prices to continue rising but they suddenly began trending down your position is on the wrong side of the trend a stop loss order s execution may not be at the exact price you specified for example say you had a stop loss entry price of 32 25 but it was executed at 32 28 or 0 03 higher than you specified that difference of 0 03 is called slippage which is caused by many factors such as lack of liquidity volatility and price gaps in news or data slippage can also occur when a regular stop loss is executed therefore some slippage should be expected in fast moving and consolidating markets some traders will use options as an alternative to stop loss orders to allow better control over their exit points make sure your brokerage supports all of the stop orders you want to use not all brokerage firms allow all of them and some have different policies about using them 1stop order vs limit orderone of the key differences between a stop and limit order is that a stop order uses the best available market price rather than the specific price you might have placed in the order because the best available price is used a stop order turns into a market order when the stop price is reached a market order is an order to buy or sell at the best available price like when you tell your broker to purchase a stock not when you re trading just if you re buying a stock they buy it at the best price as soon as they can a limit order is executed at the price you specified or better which can slightly reduce the chances of the order executing compared to a stop order if the stock price never hits your limit your trade won t execute a stop order would execute because it uses the best available price example of a stop ordera common question that traders and investors pose is where they should place their stop loss order there are too many variables to give a one size fits all answer but a rational method falls into two categories financial and technical a financial stop loss is placed at a point where you are no longer willing to accept further financial loss for example let s say you re only willing to risk 5 on a stock that s currently trading at 75 that means you ve chosen a financial stop of 5 per share or 70 as the stop price regardless of whatever else may be happening in the market a technical stop loss is placed at a significant technical price point such as the recent range high or low a fibonacci retracement level or a specific moving average just to name a few the key factor here is that if you have a market position you need to have a live stop loss order to protect your investment position 