What is a Stop order?

A Stop order is an order that is used to limit loss or protect profits in a given position. This order has become very popular in the trading world.

The stop order will be used with a limit price. Once the limit price is reached the order will become a market order and get filled. It may be used to limit loss by place a stop under the price of a stock once you buy it. This way the stock cannot fall too much before you exit it.

It can be used to protect profits if you already own a stock and have profits in it. This way you can place a stop so it can not pull back far enough for you to lose all of your gains.

This can let you exit a position at a certain price without having to monitor your position. However it can also get you out too early if the stock falls back hits the trigger for a second and then rallies back up. A stop limit order attempts to take care of this problem.

Example of How to Use A Stop

Let us say that you decide to buy stock XYZ and it is currently trading at $50. Your goal is to buy this stock at $50 and sell it at your target of $70. If you do this will give you a profit of $20 or 40%, which is a very nice return on your money.

If this works out you can make a lot of money. But if the stock doesn’t go up or crashes you can lose money and be in a losing position for a long time waiting for it to turn around. This is where a professional trader might decide that using a stop is going to give them the advantage.

You may decide that if the stock falls down to $45 you will give up on the stock and cut your losses short. In this case you can either watch the stock at sell it once it reaches $45 or you can place a stop at $45 and it will automatically be sold once the stock reaches that level.

If you are going to be trading in the stock market, stops are going to help you keep your profits and help you stay around for the long term.

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