What are stop orders?
Stop orders allow you to queue up an order, which then later becomes a live order. Therefore, you have two parts of a stop order:
- Trigger information
- Order information
For the trigger information, you must set the price that the new order becomes live. The price trigger is always based on the side of the order (buy or sell). Therefore, if the stock is $110 you must enter a price greater than $110, say $115.
The order management system basically says "OK. Since this is a buy order, if the price goes higher than $115, I'll create this order.”
Note that if you entered a stop buy order with a price of $100, it would be immediately triggered, because the price is already higher than $100.
Instead of a fixed price, you could enter a percentage offset. For a stop buy order with a % trigger, the order is created if the stock goes higher than x% above the lowest price the stock has seen since the order was placed.
Once the stop is triggered, your order becomes live. The side of the order must be the same as the side of the trigger - meaning you can have a buy trigger and then a sell order (why? well because that would be the same as a resting sell limit order). Your order can be a market order or a limit order.
Examples:
(The product is currently trading at $115)
- $120 Stop Buy Market for 1000 shares: If the price goes to $120, buy 1000 shares at the market.
- $120 Stop Buy $122 for 1000 shares: If the price goes to $120, buy 1000 shares with a limit of $122.
- $120 Stop buy $100 for 2000 shares: If the price goes to $120, buy 2000 shares with a limit of $100.
- 5% Trailing Buy Market for 100 shares: If the price goes higher than the lowest price by 5%, buy 100 shares at the market
Notice that in example #3, the order that is created by the trigger is not marketable! This is perfectly fine. The price has to go down from $120 to $100 before the trader gets executed - but that is how he wants it.
NOTE. The use of stop-buy orders is rare. Most people use stop-sell order. Here are some examples of stop-sell orders:
(The stock is currently trading at $130)
- $120 Stop Sell Market for 1000 shares: If the price goes down $120, sell 1000 shares at the market.
- $120 Stop Sell $118 for 1000 shares: If the price goes down to $120, sell 1000 shares with a limit of $118.
- $120 Stop Sell $125 for 2000 shares: If the price goes down to $120, sell 2000 shares with a limit of $125.
- 5% Trailing Buy Market for 100 shares: If the price lower than the highest price by 5%, sell 100 shares at the market.
A final note, in all the triggers I say "price" . What is price? Well there can actually be two types: Stop and Stop-by-quote. A regular stop order is triggered by the last sale/transaction price. A stop-by-quote is triggered by the ask (for buy orders) or bid (for sell orders).
Well, one final, final note - stop orders only trigger during regular market hours. For example, if you entered the following order:
- $120 Stop Sell Market for 1000 shares : If the price goes down $120, sell 1000 shares at the market.
And overnight the stock had bad earnings and opens for regular session trading at $90, your stop is going to be triggered and you will sell 1000 shares at the new market price.