# Stop Orders Explained: Types, Uses, and Strategic Placement

Get to know the different kinds of stop orders

## What Is a Stop Order?

A stop order, one of the three main order types in trading, helps traders protect their investments by limiting losses or taking advantage of market breakouts. It executes based on market movement: selling as prices fall or buying as they rise. Understanding types like stop-loss, stop-entry, and trailing stop-loss orders helps traders refine their strategies effectively.

There are several types of stop orders that can be employed depending on your position and your overall market strategy. Here's a review of the various types of stop orders and how they function relative to your trading position in the market.

### Key Takeaways

*   A stop order is a versatile tool used to limit losses or capitalize on market breakouts, acting in line with the current price movement.
*   There are three main types of stop orders: stop-loss, stop-entry, and trailing stop-loss, each serving different strategic purposes in trading.
*   Stop orders offer execution guarantees, helping traders manage risk, but they also carry the risk of short-term market fluctuations and slippage.
*   Unlike stop orders, limit orders execute at a specified price or better, which may reduce the likelihood of order execution compared to stop orders.
*   Traders should always have a stop-loss order in place for any open position to manage potential losses and maintain control over their trades.

![Stop Order: An instruction to execute a trade for a given security when a specified price is reached.](https://www.investopedia.com/thmb/xaQRQOu4oaoZ1ivk5P5Ha8PLHBc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/stoporder.asp-final-8ee9363679644944864390653c3b9c9c.png)

*Several types of stop orders can be used depending on your market strategy.*

## Exploring Different Types of Stop Orders

You can use three types of stop orders: stop-loss, stop-entry, and trailing stop-loss.

### Understanding Stop-Loss Orders

A regular [stop-loss order](https://www.investopedia.com/terms/s/stop-lossorder.asp) is recommended for any live position. A stop-loss order is just what it means—it stops losses. The stop-loss order will remove you from your position at a pre-set level if the market moves against you. Stop-loss orders are critical when you can't actively keep an eye on the market, and it's recommended to always have a stop-loss order in place for any existing position for protection from sudden market news, data releases, and the like.

For example, let's say you're long (you own it) stock XYZ at $27 and believe that it has the potential to reach $35. However, at price levels below $25, your strategy is invalidated, and you want to get out. You would then place a stop order to sell XYZ at around $25, or slightly lower, to account for a margin of error.

### What You Need to Know About Stop-Entry Orders

A stop-entry order is used to get into the market in the direction that it's currently moving. For example, let's say you have no position, but you observe that stock XYZ has been moving in a [sideways range](https://www.investopedia.com/terms/r/rangeboundtrading.asp) between $27 and $32, and you believe it will ultimately move higher.

In this case, you could place a stop-entry order above the current range high of $32—say at $32.25 to allow for a margin of error—to get you into the market once the sideways range is broken to the upside. Now that you're long, and if you're a disciplined trader, you'll want to immediately establish a regular stop-loss [sell order](https://www.investopedia.com/ask/answers/cant-enter-two-sell-orders-same-stock/) to limit your losses in case the break higher is a false one.

### Trailing Stop-Loss Orders: Protecting Your Profits

Continuing from the scenario above, XYZ has broken above the range top at $32, and your stop has been triggered at $32.28—stop orders use the best available market price—making you long in a rising market. The price keeps increasing and hits your first price objective at $35. You may now want to protect your profits in case the market reverses lower. You can accomplish this with a regular stop loss placed at, say, $34. That means you will lock in around $1.72 on the trade ($34.00 – $32.28 = $1.72) if the market turns around. In this case, you used a stop-loss order to protect your profit instead of limiting your loss.

> **Fast Fact**
>
> Some online brokers offer a trailing stop-loss order functionality on their trading platforms. These orders follow the market and automatically change the stop price level according to market movements. You can set a particular price distance the market must reverse for you to be stopped out.

To preserve your profits, you can specify $0.50 for the stock trade, meaning that the market price, currently at $35, must touch $34.50 for your stop-loss order to be triggered. However, if the price continues to move higher, the trailing stop will rise with it, always remaining $0.50 from the highest high the price has reached. So, let's say the price continues to move higher from $35 and reaches $36.75. Your trailing stop will have followed the price increase and will now be $36.25 ($36.75 – $0.50 = $36.25). Trailing stops are a great way to protect profits and stay in a position until the market has shown that it has actually reversed.

## Pros and Cons of Using Stop Orders

Advantages

*   Execution guarantee
    
*   Additional control
    
*   Losses can be limited
    

Disadvantages

*   Short-term fluctuation risk
    
*   Slippage
    

### Advantages

Stop orders have more advantages because they help minimize losses when the market isn't favorable. This is because you have an execution guarantee, where the order you placed will execute whether you're monitoring prices or not.

This gives you an additional measure of control over when you buy or sell a security—without it, one phone call could distract you for long enough that you could suffer a substantial loss, depending on the market you're trading in.

Because you've placed a stop order, you've taken a precautionary measure that can limit your losses or prevent them entirely.

### Disadvantages

One of the most significant downfalls to stop orders is that short-term price fluctuations can cause you to lose a position. For instance, if you placed a stop, expecting prices to continue rising, but they suddenly began trending down, your position is on the wrong side of the trend.

A stop-loss may not [execute](https://www.investopedia.com/terms/e/execution.asp) at your exact price. If set at $32.25, it might execute at $32.28. That difference of $0.03 is called [slippage](https://www.investopedia.com/terms/s/slippage.asp), which is caused by many factors, such as lack of [liquidity](https://www.investopedia.com/terms/l/liquidity.asp), [volatility](https://www.investopedia.com/terms/v/volatility.asp), and [price gaps](https://www.investopedia.com/terms/g/gap.asp) in news or data. Slippage can also occur when a regular stop-loss is executed. Therefore, some slippage should be expected.

In fast-moving and consolidating markets, some traders will use [options as an alternative](https://www.investopedia.com/articles/optioninvestor/08/options-stops.asp) to stop loss orders to allow better control over their exit points.

> **Important**
>
> Make sure your brokerage supports all of the stop orders you want to use. Not all brokerage firms allow all of them, and some have different policies about using them.

## Comparing Stop Orders and Limit Orders

A key difference between stop and limit orders is that stop orders use the best available market price. Because the best available price is used, a stop order turns into a market order when the stop price is reached. A market order is an order to buy or sell at the best available price, like when you tell your broker to purchase a stock (not when you're trading, just if you're buying a stock)—they buy it at the best price as soon as they can.

A limit order executes at your specified price or better, slightly reducing its chances compared to a stop order. If the stock price never hits your limit, your trade won't execute; a stop order would execute because it uses the best available price.

## Practical Example of a Stop Order in Action

Traders often ask where to place stop-loss orders. While there's no one-size-fits-all answer, methods fall into financial and technical categories.

A financial stop-loss is placed at a point where you are no longer willing to accept further financial loss. For example, let's say you're only willing to risk $5 on a stock that's currently trading at $75. That means you've chosen a financial stop of $5 per share (or $70 as the stop price), regardless of whatever else may be happening in the market.

A technical stop-loss is placed at a significant [technical price point](https://www.investopedia.com/terms/t/technicalanalysis.asp), such as the recent range high or low, a [Fibonacci retracement level](https://www.investopedia.com/terms/f/fibonacciretracement.asp), or a specific [moving average](https://www.investopedia.com/terms/f/fibonacciretracement.asp), just to name a few. The key factor here is that if you have a market position, you need to have a live stop-loss order to protect your investment/position.

## Why Do I Always Need a Stop-Loss Order When I Have an Open Position?

Not every trade is a winner. Every position has the potential to move against you an lose money. A stop-loss order will [limit your losses](https://www.investopedia.com/ask/answers/05/shortsalestoploss.asp) to about the specified level you define. It's important to note that you should create a complete strategy (entry, stop-loss, and take-profit) to manage your position before you enter that position. That way, you avoid the emotional uncertainty that comes with having an open position.

## What Should I Do If My Stop-Entry Order Is Filled?

You now have a position in the market, and you need to establish, at the minimum, a stop-loss (S/L) order for that position. You can also add a [take-profit (T/P) order](https://www.investopedia.com/terms/t/take-profitorder.asp). Coupled together, you now have orders bracketing your position. Such orders are typically linked and known as a [one-cancels-the-other (OCO) order](https://www.investopedia.com/terms/o/oco.asp), meaning if the T/P order is filled, the S/L order will be automatically canceled, and vice versa.

## Where Should I Place My Stop-Loss Order?

You can use a financial stop (how much money am I prepared to lose on this position?) or a technical S/L (what significant technical level will need to be breached for your trade scenario to be invalidated?). Not every trade is a winner, so you need to have a strategy in place before you enter a position, knowing where you'll limit your losses and take your profits.

## Should I Ever Move My Stop-Loss Order?

You should move your stop-loss order only if it's in the direction of your position. For example, imagine you're long XYZ stock with a stop-loss order $2 below your entry price. If the market cooperates and moves higher, you can raise your S/L to further limit your loss potential or lock in profits.  

## The Bottom Line

Stop orders provide essential protection for traders and investors, mitigating potential losses in an unpredictable market. Implementing a stop-loss order for every open position is crucial for safeguarding your trades against unexpected market movements. Traders should ensure their stop-loss levels align with their overall trading strategy to minimize risk and protect gains. Stop orders should always be adjusted to lock in profits as the market moves in your favor; however, avoid moving the stop away from the initial level against the market trend.

Developing a comprehensive trade strategy—including entry, stop-loss, and take-profit orders—contributes to better decision-making by eliminating emotional impulses, allowing the strategy to guide your trading actions.

> **Article Sources**
>
> 1.  U.S. Securities and Exchange Commission. "[Investor Bulletin: Stop, Stop-Limit, and Trailing Stop Orders](https://www.sec.gov/resources-investors/investor-alerts-bulletins/stop-stop-limits-trading-stop-orders)."