Author: Livia Tay, MY
Last Updated: January 2, 2025
In a trading environment, it’s crucial to understand Stop Orders, commonly known as Stop-Loss Orders. These orders are used by traders to protect themselves from significant losses by setting a specific price at which a trade should automatically be closed.
What is a Stop Order (Stop-Loss Order)?
A Stop Order is an order to buy or sell a security once its price reaches a specified stop price. When the stop price is triggered, the stop order becomes a market order, which is then executed at the best available price. The most common use of a stop order is the Stop-Loss Order, which is used to limit a trader’s loss on a position.
- Sell Stop-Loss Order
Used to sell a security once its price drops to a certain level, helping limit potential losses. - Buy Stop-Loss Order
Used to buy a security once its price rises to a specific level, often employed to cover short positions.
How Stop Orders Work
- Placing a Stop Order
The trader sets a stop price at which they want the order to trigger. - Activation
Once the market reaches the stop price, the stop order is activated and becomes a market order. - Execution
The market order is executed at the best available price once activated, which may not always be exactly at the stop price due to slippage.
Frequest Asked Question on Stop Orders
Q1: Why did my stop order execute at a different price than expected?
A1: Stop orders become market orders once triggered, so the price at execution can differ from the stop price, especially in volatile markets or during gaps in price.
Q2: Can I change or cancel a stop order once it’s been placed?
A2: Yes, you can modify or cancel a stop order before it is triggered. Once triggered, the order is converted into a market order and cannot be modified.