What it means
A sell stop below price protects a long; a buy stop above price protects a short or enters a breakout. In fast markets and gaps it can fill worse than the stop price.
In practice
Stop orders do two jobs. As a stop-loss, they close a losing trade once price reaches the level that proves the idea wrong. As an entry, a buy stop above resistance or a sell stop below support gets you into a breakout without watching the screen.
Because a stop turns into a market order, it will fill, which is the whole point of a protective stop.
What to watch for
The fill is at the next available price, not at your stop price. On a gap or a news spike that can be well beyond it. Obvious stop locations just past a clean high or low are also where price often reaches before reversing.
Related terms
3 terms- Stop-lossSLThe price where your trade idea is proven wrong and you get out, placed as an order before you need it.
- Stop-limit orderAn order that places a limit order, instead of a market order, once the stop price is hit.
- SlippageThe difference between the price you expected and the price you actually got.