A stop order is a “sleeping” order until the market price reaches the stop price and will only be converted into a market order at that time.
Stop orders can be either Buy Stop Orders or Stop Loss Orders depending on the direction of your trade.
Buy Stop Order
An instruction to buy only if the price reaches or exceeds the Stop price. The stop price must be set above the current market price. Assume EUR/USD is trading around 1.1990/95 and has shown positive momentum. You believe that the price will continue to rise it if hits the 1.2000 barrier. You could monitor prices closely and fire a Market Order manually when they hit that level, or set a Buy Stop Order at 1.2000 to automate the process.
Sell Stop Order (Stop Loss Order)
An instruction to sell only if the price reaches or falls below the stop price. The stop price must be set below the current market price. Use a Stop Loss Order to close your position and cut your losses if the market moves below your buying price. A Stop Loss will remain in effect until you close your position or cancel the order.
Pros and cons of Stop Orders
- Benefit from rising prices with Buy Stop Orders.
- Cut your losses if prices move against you with Stop Loss Orders.
- A Stop Order executes as a Market Order at the best possible prevailing market price. This means certainty of execution but no certainty over final pricing.