What is a Stop Order
A Stop Order is a pending order to buy or sell an asset at a specified price. The order is activated upon a breakdown of a specified price level. There are several types of Stop Orders, which are designed to close or open positions depending on the market situation or trading strategy.
Stop Loss is an order to close a position that a trader places in the trading terminal to limit losses. The use of this order is one of the elements of risk management. It means that at a specified price, the order to close the position with the loss is activated if the price goes against the trader. Stop Loss protects the trader's stocks and does not allow losses to exceed the specified level.
Example of a Stop Loss
Suppose the trader has a long position in the EUR/USD pair at 1.0200. The trader has defined the target for the rise of the pair as 1.0300. According to the chosen strategy, if the price falls below 1.0150, the signal received for the pair becomes irrelevant and such a position should be closed. Therefore, in order to prevent significant losses, the trader sets the Stop Loss at 1.0150. As soon as the price reaches this level, an order is activated to close the position at the set price.
Refer to this article for more information on how to set up a Stop Loss order.
Buy Stop is an order to open a position above the current market price. The use of such an order is very convenient since there is no need to monitor the price behaviour if the trader has already identified an important resistance level, the breakdown of which will indicate a further rise in price. As soon as the price reaches this level, an order is activated to open a buy position.
Example Buy Stop
Suppose the EUR/USD currency pair is moving within the Triangle pattern. A breakdown of the upper boundary of the pattern with consolidation above 1.0255 would indicate a price exit from the pattern and the beginning of the pattern execution. A trader can place a Stop Order called a Buy Stop at the price of 1.0255. An order to open a buy position is activated as soon as the price reaches the specified level.
Sell Stop is a request to open a position below the current market price. Such an order is usually used when a support level is broken. The trader only needs to determine the price at which the order is to be opened. The order is activated to open a sell position as soon as the price falls to this level.
Sell Stop example
Suppose the EUR/USD currency pair is moving within the Triangle pattern. A breakdown of the pattern's lower boundary with the price fixing under 1.0155 will indicate the price exit from the pattern and the beginning of the pattern. A trader can place a Sell Stop order at 1.0155. An order to open a sell position is activated as soon as the price reaches the specified value.
Find out more about Buy Stop and Sell Stop orders in this article.
Trailing Stop or floating Stop Loss is a tool that moves the Stop Loss following the price chart at a certain distance in points. The trader can thereby squeeze the maximum out of the market movement without limiting their profit because an order to close the position is activated as soon as the price goes against the trader and reaches a specified level. The Stop Loss follows the price chart as the price is moving in the desired direction.
An example of a Trailing Stop
Suppose a trader opened a long position in the EUR/USD at 1.0200, set the Stop Loss at 1.0150, and set a 50-point floating Stop Loss. As soon as the price of the position changes to 1.0220, the floating stop is activated at 1.0170. If the price starts falling and reaches 1.0195, the floating stop will remain at 1.0170. This will allow the trader to have a 50-point margin for price fluctuations, and will also allow profits to grow considering that it is sometimes difficult to tell how much the price can rise.
Find more information on Trailing Stop is in this article.
Where to place Stop Loss
Every position can have a different protective stop, as much depends on the trader's capital, market situation, and strategy. The placement of a stop can be divided into two types:
- Financial stop
- Technical stop
A financial stop involves limiting losses based on capital. For example, a trader should not lose more than 2% in a single trade, so a Stop Loss of no more than $200 is set, regardless of market conditions or strategy.
A technical stop involves limiting losses based on the application of technical chart analysis. For example, if a trader uses the Head & Shoulders pattern, then the Stop Loss should be set at the maximum of the right "shoulder" to prevent the trade from being held if the price moves past this maximum and the pattern becomes incorrect.