A stop order is an order to buy or sell that becomes active only after a specified price level (the “stop level”) has been reached. Stop orders work in the opposite direction as limit orders: A buy stop order is placed above the market, and a sell stop order is placed below the market. Once the stop level has been reached, the order is automatically converted to a market or limit order (depending on the type of order was specified). In this sense, a stop order acts as a trigger for the market or limit order.
Stop Market order
Once the stop level has been reached, the stop order is automatically converted to a market order.
- Example: If the current market price is 120, a trader might want to sell if the price reaches 115. A “sell stop-market” order at 115 will be used in this case. If the Best Bid price reaches 115, the “sell stop-market” order would be automatically converted to “Sell Market” order and would filled by the current market price.
If the trader wants to buy above the current price he would use a “buy stop-market” order. If the Best Ask price reaches an order price level, the “buy stop-market” order would be automatically converted to “Buy Market” order and would filled by the current market price.
Stop Limit order
Once the stop of a stop limit order is triggered, the limit order is automatically added to the book with price of limit level. If the market price does not reach the stop price, the order will not be triggered and will remain unfilled. If the stop is triggered and the limit order is placed, but the market price does not reach the limit price, the order will also go unfilled. If the market price is moving quickly enough and gaps above the limit price, there may not be enough matching bids or offers available between your stop and limit to fulfill the order.
- Example: If a trader would like to buy once the market price reaches 120, but not pay more than 122, then a stop price of 120 and limit price of 122 will be specified at the same time using a stop limit order. If the market price reaches 120, the order is triggered and will match the best available asks up to 122. If the market price moves to 122.01 or above, then the order may go partially unfilled due to the limit price.