Stop Loss Order

This article adds more details about how stops work, the different variations traders can use, specific strategies for determining stop levels, the key benefits of using stop losses for risk management, as well as some of the potential pitfalls and limitations to be aware of when utilizing stop loss orders.

What is a Stop Loss Order?

A stop loss order is an order placed with an online broker to sell a security when it reaches a specific price, called the stop price. This allows investors to automatically exit a losing position and limit potential losses if the trade moves against them. Stop losses provide downside protection by enforcing a predetermined exit level.

Types of Stop Loss Orders

There are different variations of stop loss orders traders can use. A market stop loss will execute a market sell order once the stop price is hit. A limit stop loss sets the stop price but also includes a limit price to try to get a better exit price. Some traders also utilize trailing stop losses that adjust the stop price higher as the stock moves in a profitable direction.

Executing Stop Loss Orders

Once a stock trades at or through the predetermined stop price level, the stop loss order becomes a market order (if it is set up as a stop market order) to sell at the next available price. However, stop loss orders do not guarantee an execution price, especially in fast moving or illiquid markets where slippage can occur. If a stop limit order is used, the hit of the price will trigger the submission of the order with the limit price and will only get filled if the price and volume match or exceed the order volume and price of the traders order.

Setting Stop Loss Levels

There are various strategies for determining where to set a stop loss price level. Some use a simple dollar amount or percentage below their entry price. Others use technical indicators like ATR or candlestick patterns to optimize stop placement. Trailing stops can dynamically adjust the stop level as a trade moves favorably.

Benefits of Stop Loss Orders

The primary benefit of using stop loss orders is risk management – they allow traders to cap potential losses at a predetermined level and avoid letting losses get out of control. Stop losses also help remove the emotional aspect of deciding when to exit a losing trade.

Considerations for Stop Loss Orders

While helpful risk management tools, stop loss orders have limitations. Execution is not guaranteed at the stop price, especially when markets are volatile or illiquid. Stops can also get “hunted” or front-run by algorithms. Careful stop placement and order type selection is required.

Alexander Voigt, CEO
Article by
Alexander Voigt is the founder of DayTradingZ, was a regular contributor to Benzinga and has been featured and quoted on leading financial websites such as,, Business Insider and Forbes.