Stop Order Definition: Day Trading Terminology
Stop order is a versatile order that can be great for getting in and out of trades. When you place a stop order you are saying that you want to get in or out of a trade when prices hit your stop price and once they do, it turns into a market order and will execute at the next available price. Stop orders are mainly used for protecting long or short positions once you get into a trade.
So for example, if you are long NFLX at $128.25 and you want to protect your position if prices start to drop you can place a sell stop order that will trigger when prices trade at your stop price and then will turn into a market order closing out your position. Sell-stops are usually used to protect long positions and will only trigger at or below your stop price while buy-stops are used to protect short positions and will only trigger at or above your stop price.
You can also use stop orders to get into a position like trading the breakout example above. If you notice there is a lot of resistance at a certain level you can place a buy-stop order just above that resistance which will trigger and buy shares if prices breakout above that resistance.
It’s great for buying into momentum as shorts will most likely be covering above the resistance level causing the buying pressure to push prices even higher. In the 5-minute chart of NFLX above, you will see clear resistance at $128.41 and once it broke through prices kept moving up with over 60 cents of profit potential.
Warrior Trading Pro Tip
Like market orders, stop orders turn into market orders once triggered and will fill you at whatever the price is at that time, which can lead to slippage. One way to help avoid that is by placing stop-limit orders. This type of order will require you to put in a stop price and a limit price where the stop price will act as a trigger and then turn the order into a limit.
So if you have a sell stop limit order where the stop is $100 and the limit is $99.95 and the price trades down to $100, it will trigger into a sell limit at $99.95 and won’t sell any shares lower than that price. I find this to be helpful when entering a trade because it will limit how high you buy and how low you sell shares.
Other Common Types of Orders