What is Stop Order?

What is Stop Order?

A stop order is an instruction to your broker to enter or exit a trade if the market price hits a certain predetermined level, which is less favorable than the current price.

You’ll determine the level at which stop orders will be triggered, within certain parameters—it also depends on whether you’re going long, short, and entering or exiting a trade. It is important to note that stop orders do not guarantee order execution at the predetermined price. They trigger a market order when that predetermined price is hit, which can be vulnerable to slippage.

There are two main types of stop orders: stop-loss and stop-entry.

STOP-LOSS ORDER

This is when you exit a trade when a price moves against you and hits a certain level of loss—limiting future losses for you. Stop-loss orders can also potentially result in profit if set above the opening level (in the case of a long position, or below it in the case of going short). When the predetermined price limit is reached, your stop-loss order triggers and the position is closed using a market order at the current market prices.

Stop-loss orders are often used as risk management tools, set at a certain price lower than your opening position (for a long position) or higher (for a short position). The exact level will be determined by whatever amount of loss you feel comfortable with for that individual trade. This way, you limit the opportunity that you will lose more than you’re prepared to, if a trade doesn’t work out as expected.

• If you’re buying (going long), the stop order will be set below the market price.
• If you’re selling (going short), the stop order will be set above the market price.

(Infographics showing going long and going short: stop-loss order – Note: Infographics themselves cannot be reproduced here, but the descriptions of their content are retained.)

STOP-ENTRY ORDER

The opposite of a stop-loss order, a stop-entry order is used to open a position when the market hits a predetermined level.

• If you’re buying (going long), your stop-entry order level will be above the current price.
• If you’re selling (going short), your stop-entry order will be below the current price.

Opening a stop-entry order position once the market is moving against you can actually be a valuable strategy for hedging or potentially trading a sudden market spike or downturn. For example, let’s say you believe that, should EUR/USD drop to a certain level, it will rebound significantly and rapidly. So, you set a stop-entry order to capitalize on this, opening a long position should your prediction come true.

(Infographics depicting it going long and going short: stop entry order – Note: Infographics themselves cannot be reproduced here, but the descriptions of their content are retained.)

How Does Stop Order Work?

Stop orders are designed to work automatically, so you don’t have to watch the market constantly to check whether prices will move against you. This could be especially useful in volatile markets when prices change suddenly and you don’t have time to manually close out a trade that’s turned against you (in the case of stop-loss orders) or open one during a short window of opportunity (in the case of stop-entry orders).

HOW STOP-LOSS ORDERS WORK

When you open your position, you’ll manually set your stop-loss order parameters. If the market moves against you once your position is opened, your stop order is automatically triggered when the price is reached that you’ve set as your stop amount. At this point, the trade is closed with a market order at current prices to limit further loss. Again, remember that this order is at risk of slippage.

TYPES OF STOP-LOSS ORDERS

There are two types of stop-loss orders. Here are the ones you can use:

• Normal stop-loss order: This is the type of stop-loss order we’ve explained above; it kicks in when the price limit you’ve set has been reached.
• Trailing stop-loss order: Rather than kicking in at a certain price point, a trailing stop loss is predetermined by how far away from your opening position it is. For example, if you don’t have a specific amount of loss you’re comfortable with in mind but instead would rather not lose more than 20 pips’ unfavorable movement, you can set a trailing stop order that will move with your position as it moves favorably, then closing your trade if the market moves 20 pips against you from the favorable movement seen.

(An image of the tastyfx platform on a mobile app with the stop loss section highlighted – Note: The image itself cannot be reproduced here.)

HOW STOP-ENTRY ORDERS WORK

A stop-entry order involves you manually setting the level at which you want to open a position, if the market moves in your favor.

As in our previous stop-entry example, this may be because you believe that, should the price of EUR/USD hit a certain ‘low’, the price will rally. So, you’d set a stop entry order around the level that you’ve predicted.

If that price level is reached, your stop-entry order automatically opens a long position for you without you having to do anything, enabling you to have the potential to ride the EUR/USD price rally (if your prediction happens to be correct) thanks to your stop-entry order. Losses will accrue the same as any position if prices do not move in the favorable direction.

HOW STOP ORDERS WORK FOR FOREX TRADING

You’d enter your amount of forex lots to buy or sell and your stop amount. The order will be filled when your stop level has been met, using a market order at the best available price. This market order will attempt to execute at your predetermined price, but the risk of slippage exists, especially in volatile periods. Your stop order could execute at less favorable prices.

What are the Benefits and Risks of Using Stop Orders?

Pros and Cons of Using Stop Orders:

Understanding the advantages and disadvantages of stop orders is crucial for deciding whether they are right for your trading strategy.

Benefits of Using Stop Orders:

Stop orders can help limit your potential for loss without capping your potential for profit.

Since stop orders are triggered automatically, you are freed from constantly monitoring your open positions (for stop-loss orders) or the market (for stop-entry orders) to detect adverse price movements. However, you should not rely solely on stop orders; regular checks of your positions, orders, and executions are still beneficial.

They can also mitigate the impact of emotional trading. By setting your stop-loss, you essentially automate the exit from an unfavorable trade.

Risks of Using Stop Orders:

If an unfavorable market movement is only temporary – for example, a 'dead cat bounce' on an asset you've shorted – you might forfeit future profits when that short-lived adverse movement triggers your stop-loss.

Setting a standard stop-loss does not guarantee execution at that precise level. If the market moves rapidly past your set stop-loss point, slippage can cause your order to be fulfilled at a worse price than your intended stop-loss amount.

Final Words

Stop orders are vital tools for disciplined trading, automating risk management and strategic entries. They protect capital and remove emotional decisions by predefining exit and exit points. However, their automation carries risks like slippage during volatile markets, which may lead to worse-than-expected prices. They can also be triggered by short-term fluctuations, closing positions prematurely. Thus, stop orders should complement—not replace—a broader trading strategy. Regular monitoring and market awareness remain essential. Used wisely, they are a key component of a professional and prudent trading approach.

Further Reading

• What is Limit Order?
• Master Crypto Futures: Last Price vs. Mark Price
• 5 Exit Strategies for Traders
• 10 Terms Every Crypto Trader Should Know

Disclaimer: The opinions expressed in this article are for informational purposes only. This article does not constitute an endorsement of any of the products and services discussed or investment, financial, or trading advice. Qualified professionals should be consulted prior to making financial decisions.