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Key Takeaways
- The stop price sets the activation event.
- A conventional stop becomes a market order when its qualifying trigger occurs.
- Your fills set the result, and in the example a $49.50 stop sells at a $49.10 average.
- Sell stops serve exits from long positions or entries into shorts; buy stops serve the reverse.
- Check the broker’s trigger rule, eligible hours and duration before you rely on a stop.
What is a stop order?
A stop order is an order that activates when price reaches its stop price. A conventional stop then becomes a market order. The trigger sets the timing and the fills set the price, so when price gaps through the stop, the fill lands beyond it. A sell stop that protects a long position is commonly called a stop-loss order.
Buy stop vs sell stop
Sell stops commonly sit below the market to exit a long position. Buy stops commonly sit above it to cover a short. Both also support planned entries after a chosen price level trades.
Formula
Sell-stop reference distance = entry price − stop price- Reference dollar difference = distance × shares.
- Actual gross result = sale proceeds − entry cost.
- Average fill = total sale proceeds / shares sold.
Stop order example: a $49.50 sell stop on 400 shares
A trader owns 400 shares bought at $52.00 and places a sell stop at $49.50. A qualifying trade below the stop activates the market order. It fills 200 shares at $49.20 and 200 at $49.00.
- Stop-reference distance: $52.00 − $49.50 = $2.50 per share
- Stop-reference difference: $2.50 × 400 = $1,000
- Proceeds: 200 × $49.20 + 200 × $49.00 = $19,640
- Average fill: $19,640 / 400 = $49.10
- Gross loss: $20,800 − $19,640 = $1,160
- Difference from the stop-reference result: $160
The trigger activates the market order. The two executions establish the $49.10 average fill and $1,160 gross loss.
The position starts with 400 shares bought at $52, a $20,800 entry cost. The sell stop is $49.50. After a qualifying trade activates it, 200 shares sell at $49.20 and 200 at $49.00.
The $19,640 proceeds produce a $49.10 average fill and a $1,160 gross loss. The difference from the $49.50 reference is $160 across the position.
How stop orders trigger and how long they last
Choose the trigger, quantity, duration and eligible session when you enter the order. Your broker decides which trades or quotes activate it, so read that rule first. A day order expires with its session; a good-till-canceled order stays working across sessions under the broker’s rules.
Stop order vs stop-limit order
The activated market order takes available prices. A stop-limit order instead releases a limit order that sets the worst acceptable price. Compare their order mechanics before you choose one.
How to choose a stop price
Use support and resistance, price structure and position size to define the trade. Size the position so a fill beyond the stop still fits the risk budget: the example’s gap added $160 to the $1,000 planned loss.
Price the option at your stop in the options profit calculator, then again at a gap through it, so both losses are dollar figures before you place the order.
Limitations of stop orders
- The stop sets the trigger and the market sets the fill. In the example, the $49.50 stop produces a $49.10 average fill and a loss $160 larger than the stop reference.
- When price gaps through the stop, the market order fills at the first prices after the gap. Size the position for that fill.
- A brief trade or quote triggers the order even when price reverses at once, and the sale stands when the market rebounds. Set the stop past the noise around a level.
- Brokers trigger stops on different events, such as last-sale transactions or quotations, and allow different sessions, so read your broker’s rule before the stop has to work.
- Match the duration to the holding period. A day order ends with its session, while a supported GTC instruction persists under the broker’s rules.
Bottom line
A stop order turns a price level into an automatic market order, which makes it a simple tool for cutting a loss or entering on a breakout. Set the stop from price structure and position size, size the trade for fills beyond the stop, and confirm the broker’s trigger rules and duration.
Clear answers
Frequently Asked Questions
Sources and Further Reading
- Cboe: Titanium U.S. Equities BOE Specification
- Fidelity: Know Your Trading Orders
- FINRA: Stop Orders During Volatile Markets
How entries are sourced, calculated and updated: editorial methodology.