Sirwin
Sirwin

Trading 101 -  Order Types: Stop Orders

By TradingBull | TradingBull_articles | 18 Jan 2021


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A stop order is an order to buy or sell an asset which, when triggered, converts into a market order. The order is executed when the market price of the asset reaches the value set for the stop order (it can also convert into a limit order if stop-limit). A stop order is used to protect from losses or secure profits.

Pros: Certainty of fast and full trade execution. Stop order is not visible on the order book (able to be seen by other traders) until triggered. Stop order can be cancelled at any time.

Cons: Price not warranted after stop order is triggered (floating execution price: market order).

Example:

You bought ABC at $9,500 and know the market can be volatile. You want to protect your position while being away from the screen.

1- Stop-loss (sell ABC/buy usd): A stop order to sell ABC if the price is touching or falling below $9,000 (regardless of what the price will be afterwards, as it becomes a market order) will protect you from suffering heavy losses in case of sudden downward trend below the set price.

2- Take-profit (sell ABC/buy usd): You have decided that your trading strategy on this position is to make $500 profit per ABC. You want to sell automatically if the price goes above $10,000 (regardless of what the price will be afterwards).

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Using a stop order results into paying the taker fees to the Broker/Exchange (as it convert into a market order).

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TradingBull
TradingBull

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