SellStop

SellStop: Trading Basics

Beginners in financial markets must comprehend order kinds. Consider the SellStop order. This article discusses the SellStop order and how traders may utilize it.

A SellStop order?

A broker receives a SellStop order, also known as a stop-loss order, to sell a securities or asset at a specific price or below it. If the market price drops below a specified level, this order automatically executes a sell order to prevent losses and safeguard gains.

SellStop orders are usually set below the market price, so they only activate if the market price falls to the stop price or below. At the stop price, the order becomes a market order and is executed at the best price.

Trading using SellStop orders

Traders employ sellstop orders to reduce losses and risk. Setting a stop price lets traders determine their risk tolerance and safeguard their capital.

Suppose you bought firm shares at $50 apiece and put a SellStop order at $45. If the stock price drops to $45 or lower, your SellStop order will sell the shares automatically. This limits losses to a certain level.

SellStop orders also lock up gains. At a specific market price, traders might change their SellStop order to track the price and safeguard their winnings. This method is called trailing stop.

Remember that SellStop orders do not guarantee execution prices. In fast-moving markets or trading gaps, the order may be executed at a different price than the stop price. This is slipping.

SellStop order pros and cons

Trading using SellStop orders has several benefits:

Limiting risk: SellStop orders let traders set their risk limit.
Automation: When the stop price is reached, SellStop orders are executed automatically.
Flexible SellStop orders let traders trace the market price and safeguard gains.

Importantly, SellStop orders have limitations:

Slippage: Market volatility may cause SellStop orders to execute at unknown prices.
Whipsawing: SellStop orders may prematurely liquidate shares in stormy markets.
Technical difficulties: Technical faults might prohibit SellStop orders from executing.
Conclusion

Beginner traders may limit risk and preserve their capital using the SellStop order. Stop prices let traders minimize losses and lock in winnings. To make smart trading selections, you must comprehend SellStop orders’ pros and cons.

References and sources:
Sell Stop Order—Investopedia.com/terms/s/sellstop.asp
The Financial Times: Stop Order | https://www.ft.com/lexicon/stop-order
NASDAQ: Understanding Stop-Loss Orders (2019-09-10).