A stop order is an order type which issues an order once a specified price has been met. This price level is known as the trigger price, and when it is reached or surpassed, the stop order is automatically placed in the order book.
A stop order provides a greater flexibility of completing a trade at a predetermined entry or exit price. When entering a position, traders use a stop order to determine where an order should be triggered. When exiting a position, traders use a stop order as a risk management instrument to help limit losses or lock in profits.
There are three types of stop order:
- Stop market order – A market order will be issued once the trigger price has been reached.
- Stop limit order – A limit order will be issued once the trigger price has been reached.
- Trailing stop order – Traders must specify a trailing value. A type of trade order that gets executed once the price moves against in your favour, whether you use a long or short strategy. This type of order is designed to protect profits while the trade is still open and continues to gain.