A stop order is an instruction to enter a trade once the market reaches a specified price. Unlike a limit order, the target price is less favourable than the current market price. Traders use stop orders when their plan requires entry at a specific price level, conditional on the market reaching it — for example, where entering a position only makes sense if a particular level is broken.
For a buy stop, the target price is above the current market price. For a sell stop, it is below.
Once the stop price is reached, the order executes at the best available market price at that moment. This is not guaranteed to be the stop price itself.
You can apply a Good Till Cancelled (GTC) setting to keep the order active until either it is filled or you cancel it manually.
Example:
- Gold CFD is trading at $3,300.
- You expect upward momentum to continue if the price breaks above $3,350.
- You place a Buy Stop order at $3,350.
- The position opens if the market reaches $3,350 or higher.
Slippage on stop orders
Because a stop order executes at the next available market price after the stop level is reached, the fill price may differ from the stop price. This can occur when the market gaps, for example at the open following an overnight announcement.
Example:
A US pharmaceutical company closes at $2.50 per share. Overnight, the company announces the successful completion of a drug trial. You place a Buy Stop order for 100 shares at $2.60, expecting the news to push the price higher. When the market opens, demand is high and the opening price is $3.00. The market did not trade at $2.60, so the order fills at the next available price: $3.00 in this example. The entry cost is higher than the stop price.