Stop Order: A Helpful Tool for Beginners: Trading Basics
New traders may have heard the word “stop order” but don’t know what it means or how it may help them. Stop orders are important for novices in trading, as we shall explain in this post.
A stop order?
A stop order, often called a stop-loss order, instructs a broker to trade when the market hits a specified price. It automatically places a market order to sell or buy an asset at the stop price to minimize losses.
Trading risk management requires stop orders. Setting a stop order limits your trading losses, shielding you from large market swings. Stop orders are often intended to restrict losses, but they may also be used to secure gains at a certain price level.
Types of Stop Orders
Beginners should know the many forms of stop orders:
1. Stop-Market Order:
Primary stop orders are stop-market orders. The stop price turns it into a market order to buy or sell a security at the market price. Your deal will be performed at the market’s best price.
2) Stop-Limit Order:
Stop-limit orders combine stop and limit orders. After reaching the stop price, it places a limit order to purchase or sell a security at the limit price. This gives you greater control over your trade’s pricing, but if the market moves too fast, it may not be performed.
3: Trailing Stop Order
Trailing stop orders move with the market. It’s a percentage or dollar amount below the market price for long trades (or above for short trades). Trailing stop orders automatically adjust as market prices rise. This lets you make more money if the price rises and safeguard your gains if it falls.
Advantages of Stop Orders
Stop orders aid traders starting out:
1. Manage Risk:
Stop orders reduce risk by designating a trading exit level. You won’t have to continually watch the market, decreasing emotional decision-making and huge losses.
2. Price Gap Protection:
Price gaps occur when a securities starts considerably higher or lower than its closing price, skipping price levels. When a stop order is reached, your transaction will be completed at the next available price, protecting you against price gaps.
3. Automation:
Stop orders automate trading, letting you plan your departure. You don’t have to continually watch the market or make snap judgments, saving you time and mental energy.
References and sources:
Investopedia – https://www.investopedia.com/terms/s/stop-order.asp
The Balance – https://www.thebalance.com/how-to-use-stop-loss-orders-1031148
eToro – https://www.etoro.com/trading/learn/stop-loss-orders/