You can think of a stop order as the reverse of a limit order. A stop order allows selling below the current market price or buying above the current market price if the stop price is reached or breached.
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.
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.
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.
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