30 Dec

What is a “Stop Order”?

A stop order, sometimes called a stop-loss order, is an order to go long (buy) or go short (sell) one or more contracts once the price of the stock reaches a specific price. When the market moves to the price you have specified, the stop order becomes a market order.

Buy (Long) Stop orders must be placed above the current price. Please consider using a Limit order or a Market order.

Sell (Short) Stop orders must be placed below the current price.

The two main ways to use a stop order are:

To stop loss
Let’s assume you are in a contract of Wheat. You got in long at 405.00 and it is currently still at 405.00. You can place a sell stop order at 403.00, which would prevent losses beyond $100. This is great for mitigating risk.

To secure profit
Again, let’s assume you are in a contract of Wheat. You got in long at 405.00 and it has gone up to 408.50 for a profit of $175. You can secure some of your profit by placing a sell stop at 407.00, thus *locking in a profit of $100 if the market turns against you. As the price of Wheat continues to go up, you can continue moving your stop up so that you lock in more and more profit.

*Note: In a real life situation, the stop price you specify may actually get filled at a lower price depending on fluidity and other market factors. For the purposes of papertrademe.com, orders will always be filled at the specified price once the market touches or goes through the price.

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