Stop Orders

Now that a market order is clear, a stop is easy: it is a sleeping order that wakes up and turns into a market order the instant the price reaches its trigger. So it inherits the market order's "fill, not price" behavior.

What a Stop Order Is

A stop order is an instruction that stays off the book until a price event sets it in motion.

• Stop order (stop-loss order): an order that rests dormant and does not appear on the book until the market trades at or through the specified stop price.
• Becomes a market order once triggered: the instant the stop price trades, a plain stop turns into a market order. Because of that, a stop guarantees a fill once triggered, not the stop price itself. In a fast or gapping market the actual fill can be well past the stop level (slippage).

A stop is different from a limit order, and the difference matters for the next section:

• Limit order: buys at a stated price or lower, or sells at a stated price or higher. It is never filled worse than the limit, and sometimes better.
• A limit can miss entirely: in a fast market a limit order may not fill at all, because the price runs away from it before it can trade.
• Why it matters next: a plain stop uses no limit, so it always fills once triggered; a stop-limit (next section) does use a limit, which changes everything.

Exam Tip: Gotchas

• A stop does not guarantee the stop price. Once the trigger trades, a plain stop becomes a market order, so in a fast or gapping market the fill can be far past the stop. A choice claiming a stop "guarantees you exit at the stop price" is wrong.

Buy Stop: Above the Market

A buy stop sits above the current price and triggers as the market rises up to it.

• Placement: a buy stop is placed ABOVE the current market price and triggers as the price rises to it.
• Use 1, protect a SHORT position: a short profits when the price falls, so a rising price hurts it. A buy stop above the market caps the damage by buying to cover if the price climbs.
• Use 2, enter on an upside breakout: a trader can use a buy stop to go long once the price breaks out above a resistance level, entering only if the market confirms the move up.

Sell Stop: Below the Market

A sell stop sits below the current price and triggers as the market falls down to it. This is the classic stop-loss.

• Placement: a sell stop is placed BELOW the current market price and triggers as the price falls to it.
• Use 1, protect a LONG position: a long profits when the price rises, so a falling price hurts it. A sell stop below the market caps the damage by selling out if the price drops. A sell stop protecting a long is the classic stop-loss.
• Use 2, enter on a downside breakdown: a trader can use a sell stop to go short once the price breaks below a support level, entering only if the market confirms the move down.

Here is the placement and purpose of each stop side by side.

Think of it this way: a stop is a tripwire set on the far side of the move you fear. Long and dread a drop? String the wire below you (a sell stop); if the price falls into it, the wire yanks you out at market. Short and dread a rally? String the wire above you (a buy stop); if the price rises into it, the wire buys you back. The wire guarantees it fires, but not the exact price where you land.

Exam Tip: Gotchas

• Memorize the placement: buy stop ABOVE the market, sell stop BELOW the market. A buy stop protects a short or catches an upside breakout; a sell stop protects a long or catches a downside breakdown. Flipping these two is the most common stop-order error.
• A sell stop and a sell limit are not the same order. A sell stop rests below the market and fires when the price falls to it; a sell limit rests above the market and fills only at that price or higher. Same word "sell," opposite placement and opposite trigger logic.