Stop order (stop loss)

An order that becomes a market order once a set price is reached.

Definition

A sell stop below the current price is the common stop loss: if the stock falls to the stop price, a market order sells it. A buy stop above the market can be used to enter on a breakout or to cover a short.

How it is used

Stops define in advance where a trade is considered wrong, which makes risk measurable.

Watch out for

The fill price can be worse than the stop price in fast markets or on overnight gaps.

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