Trading has a language all its own, and sometimes it can be confusing, so we want to help explain stop orders so you can make good decisions on the best way to use them.
When we make a new trade we issue an alert with our buy price, our target price, and our stop price. The target, obviously, is where we are hoping the trade will go. Since the price is up above the current price you can safely set a simple sell order at that price, good until canceled, and you will be filled when the stock reaches that level.
The stop price is meant as protection in case the trade goes against you. The stop price is below the current price that you bought at, so you can’t place a sell order at that price. If you did, the trade would instantly be filled at the current price. For example, if the price was currently $10, and you set a sell order at $9, you would be filled immediately at $10 because $10 is even better than $9. Makes sense, right?
So instead we place what is called a Sell Stop. But it can’t be that easy either, because there are different types of sell stop orders. And that’s what we want to explain.
A basic Sell Stop order works like this: EUO etf is trading at $21.83. You are long, and if it drops to $21.49 you want to be out. You place a Sell Stop to trigger at $21.49. If the stock hits $21.49 (either actually making a trade at that price, or being offered at that price) your stop is considered triggered. Your brokerage then immediately issues a “sell at the market” order. This may very well get you filled at $21.49 in a liquid etf, but might mean you don’t get filled until $21.40 or $21.30 in a less liquid one.
A stop limit is a stop order that triggers at one price, but will only fill above a limit price. For example, if EUO is trading at $21.83 and you want to exit the trade if it drops below $21.49 you could place a Stop Limit order with the stop price at $21.49, and the stop limit price at $21.45. What this does is allows a couple cents wiggle room in case the etf is dropping quickly. In this case when $21.49 is triggered, your brokerage issues a “sell limit” order. Essentially it enters a sell order at $21.45. You will only get filled at $21.45 or higher. The risk in a Stop Limit order is if the etf shoots past your limit before you are filled. Maybe it drops quickly, trades at $21.51, but then doesn’t trade again until $21.43. In this case you wouldn’t get filled, and the etf could continue lower with you still in it.