Stop loss trading
Family II · Orders
Not to be confused with stop limit order, stop order, trailing stop.
Stop loss trading refers to the use of a stop order to exit an open position at a predetermined trigger price, limiting the loss if the market moves against the holder. The stop price is set on the losing side of the current market, and once touched, the order becomes a market order (or a limit order, depending on the order type) to close the position. The term describes the practice of using such orders, not a distinct order type in itself.
How a stop loss order works
A stop loss order rests with the broker until the market trades at or through the specified stop price. At that point the order is triggered and sent to the market. For a long position, the stop is placed below the current price; for a short position, it is placed above. The order may be a plain stop (which becomes a market order on trigger) or a stop-limit (which becomes a limit order on trigger). The choice affects execution certainty and slippage. Regulations and broker rules determine whether stop orders are held on the broker's server or on the exchange, and whether they are visible in the order book.
Worked example
A trader buys 100 shares at 50.00 and sets a stop loss at 47.50 to cap the loss at 2.50 per share.
The actual loss may differ if the market gaps through the stop price or if the order fills at a worse price.
Placement and trigger conditions
A stop loss order can be placed immediately after opening a position or later. Some brokers allow only one stop per position, while others support multiple or contingent orders. The trigger may be based on the last traded price, the bid, the ask, or a mark price, depending on the instrument and venue. In fast markets, the stop may be triggered but filled at a price beyond the stop level, a phenomenon known as slippage. Stop orders are not guaranteed to execute at the stop price.
Often confused with
- stop limit order
- A stop-limit order combines a stop trigger with a limit price, so after triggering it becomes a limit order that may not fill; a plain stop loss order typically becomes a market order and is intended to fill. The visible sign is the presence of two prices (stop and limit) on the order ticket.
- stop order
- A stop order is the generic order type that becomes a market order when the stop price is reached; stop loss trading is the practice of using such an order to exit a losing position. The visible sign is that the term 'stop loss' describes the purpose, while 'stop order' describes the mechanism.
- trailing stop
- A trailing stop moves the stop price automatically as the market moves favourably, whereas a stop loss order has a fixed stop price unless manually adjusted. The visible sign is that the stop price on a trailing stop changes over time, while a stop loss price remains constant.