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Mastering the Order Types: Stop Orders

Learn when and why traders use stop orders, as well as the inherent risks and potential benefits.

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Using a stop order is one way for a trader to gain better control of their order. Understanding what order types are, why and when traders use them, and what factors impact their execution can help you match an order type to your specific trade objectives.

Stop order

A stop order causes the submission of a market order when a stock trades at, or through, a specified “stop” price, based on the last trade price. It essentially triggers the submission of a market order.

Once triggered, stop orders become market orders, which will generally result in an execution once they are submitted. There is no guarantee of any specific execution price or price range: the resulting execution price may be above, at, or below the stop price itself. Therefore, traders should carefully consider when to employ a stop or a stop-limit.

When to use stop orders

Because stop orders result in the submission of a market order, the same execution and eligibility characteristics apply:

  • Stop orders will only trigger during the standard market session, 9:30 a.m. to 4:00 p.m. ET. Stop orders will not execute during extended-hours sessions, such as pre-market or after-hours sessions, or take effect when the stock is not trading (e.g., during stock halts or on weekends or market holidays). Although stop orders only trigger during the standard market session, traders can decide whether the stop should only be effective for the current market session or carry over to future market sessions. Stop orders designated as day orders expire at the end of the current market session, if not yet triggered. Good-till-canceled (GTC) stop orders carry over to future standard sessions if they haven’t been triggered. At Schwab, GTC remain in force for up to 60 calendar days unless canceled.
  • Although stop orders only trigger during the standard market session, traders can decide whether the stop should only be effective for the current market session or carry over to future market sessions. Stop orders designated as day orders expire at the end of the current market session, if not yet triggered. Good-till-canceled (GTC) stop orders carry over to future standard sessions if they haven’t been triggered. At Schwab, GTC remain in force for up to 60 calendar days unless canceled.

When a stop order is submitted, it is sent to the execution venue market and placed on the order book, where it remains until the stop triggers, expires, or is canceled by the trader.

Why traders use stop orders

Stop orders can provide traders with a way to automatically trigger an order if a stock’s price reaches a specified amount.

  • Sell stop – A sell stop represents a market order to sell at the next available bid price, if and when the bid decreases to, or down through, the stop price. Enter a stop price for a sell stop order below the current bid price; otherwise, it will trigger immediately.
  • Buy stop – Although more commonly used as an exit strategy, stop orders can also be used to enter a position once it reaches or surpasses a particular price threshold. A buy stop represents a market order to buy shares at the next available ask price, if and when the last trade price increases to, or up through, the stop price. Enter the stop price for a buy stop order above the current ask price; otherwise, it will trigger immediately.

Stop order risks

  • Gaps – Stop orders are vulnerable to pricing gaps, which can sometimes occur between trading sessions or during pauses in trading, such as trading halts. The ultimate trade execution price can be higher or lower than the stop’s trigger price, which merely denotes when the order should be submitted and has no influence over the execution price itself.
  • Fast markets – The speed of price movements can affect a market order’s execution price. When the market fluctuates, particularly during periods of high trading volume, the price at which your order executes may not be the same as the price you saw while building or submitting your order.
  • Liquidity – It is possible to receive different prices for parts of an order, especially for orders involving large number of shares. A market order will fill at best bids or asks until complete, and subsequent prices may differ greatly from the initial fill price.
  • No market for the stock – If there is no market for a stock, meaning there is no bid or ask available or the stock itself is not open for trading, the market order triggered by your stop can’t be executed.

What’s next?

Stop orders can be a useful tool if your trading priority is immediate execution when the stock reaches a designated price and you are willing to accept the risk of a trade price that is away from your stop value. You should understand how market hours, liquidity, and market speed can affect the execution and pricing of a stop order.

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