I'm writing in regards to my interest in trying to fully understand the STOP ORDER and being aware of this one being a fairly fundamental concept for some.
(However as a beginner or not, you might feel the same confusion as I do regarding the following inconsistencies in the way I'll explain them)

It begins with this clay-trader explanation where he addresses the order type (in this case naming it "stop loss order") in minute 4, second 15 of the Youtube clip below (already redirected to the section).

Video: https://www.youtube.com/watch?v=DF23jO8Y0n0&t=4m15s

As you can see, he refers to the order being an "I want out" method, so in other words we'll assume this is an EXIT strategy, which by definition must be a "selling type of order" and if you saw the full video fragment he never really talks about "buying" with a stop order. Another key point is how he divides it into both Market & Limit order being the subtypes of the StopLoss, then moves to explain each.

In contrast, we see on this page of the "stock basics" Investopedia course under the "stop orders" section what I'll explain below...and by the way this is the exact definition and overall info of the Main article for "stop orders" which is this one: (https://www.investopedia.com/terms/s/stoporder.asp), main latter article just goes into a bit of depth and examples.

Stock Basics Article: https://www.investopedia.com/university/stocks/stocks4.asp

So, I'll fragment each key argument as follows (they're not that many) highlighting in BOLD what I grasped from that:

Paragraph 1

  • "Stop orders are contingent on a certain price level being attained to activate the trade. With a stop order, your trade will be executed only when the security you want to buy or sell reaches a particular price (the stop price)"

  • "Also known as a stop-loss order, this allows you to limit your losses"

Here we see on the first and second extracts of the section respectively how they clear out:

First, that the security in question can either be sold or bought (when on claytrader's video it was clear that it meant only a sell). And second that stop orders are also known as Stop loss. (the latter just to have in mind as we progress in this attempt to denote the real definition of the stop order, also clearing that clay didn't meant "another type of order").

Paragraph 3

  • "One disadvantage of the stop order is that the order is not guaranteed to be filled at the preferred price the investor states. Once the stop order has been triggered, it turns into a market order, which is filled at the best possible price"

Now, here lies the major inquiry of mine, Why only market order? since as we saw the first video expands the stoploss into both market & limit.

Then I decided to look into the Main StopLoss article for Investopedia (I had only looked at the Main "Stop Order" article). To gain more insight..the paragraph below is for the "stop loss order gapping" section, in the article.

Article: https://www.investopedia.com/terms/s/stop-lossorder.asp

Paragraph 2

  • "Price gapping is a major drawback of stop-loss orders and a reason why many experienced investors use stop-limit orders instead of stop-market orders".

Here is imperative that there must be a Stop Limit order and this doesn't seem to be a subcategory of StopLoss orders in general since they not only are market in nature but only have 2 variations: buy or sell...so it has to be a VARIATION. As you can see I'm not posting necessarily questions until now just the facts of my understanding however are my statements true until now? Which takes me to the final article for "Stop Limit Orders". Now my following question would be different.

Here I entered the article only for "stop limit orders", and found the description in quotes below...

Article: https://www.investopedia.com/terms/s/stop-limitorder.asp

  • "The stop-limit order will be executed at a specified price, or better, after a given stop price has been reached. Once the stop price is reached, the stop-limit order becomes a limit order to buy or sell at the limit price or better".

Why on earth would an order that is triggered at a specific price be converted to another order that triggers at a specific price? I'm not sure I understand well but the nature of a Limit (not stop limit but limit only), is to only execute (buy or sell) at a target, then what is the point in placing the stop limit in the first place rather than just placing a limit?

Also, the question I said would be different is ...If the limit stop loss is an order that triggers a secondary execution...again: "Once the stop price is reached, the stop-limit order becomes a limit order to buy or sell at the limit price" then what is the difference with the conditionary/contingent order OSO/OTO "Order Sends Order / One Triggers Other" which by nature sends a second order once a threshold is attained?

Thankyou for being patient with me. I would love to know if you feel there are indeed inconsistencies and the answer to the last question.


TLDNR links. Here is how the orders work:

The purpose of a Stop order is to buy or sell at the market if the trigger price is hit or penetrated. There's no guarantee of a specific execution price - it may execute significantly away from the stop price.

  • A Sell Stop order is always placed below the current market price and is typically used to limit a loss or protect a profit on a long stock position.

  • A Buy Stop order is always placed above the current market price. It is typically used to limit a loss or help protect a profit on a short sale.

The purpose of a Stop Limit order is to buy or sell at a limit price. When a trade occurs at or through the stop price, the order becomes executable and enters the market as a limit order, which is an order to buy or sell at a specified price or better.

A Stop Limit order eliminates the price risk associated with a Stop order where the execution price is not guaranteed, but it exposes you to the risk that the order may never fill, even if the Stop price is reached. You could miss the market altogether.

Other types of Stop orders are Adjustable, Trailing Stop, Trailing Stop with Limit, Stop with Protection, etc. Availability of these depends on the broker.

  • A Sell Stop order can also be used to enter a short trade and a Buy Stop order can also be used to enter a long trade! – Victor Jun 1 at 4:44

The different between 'stop' and 'stop limit' is very simple for most exchanges.

A regular stop order has a price, which when penetrated is submitted as a regular market order (sell at market for a long position). This means sell at any price on the market. It ensures that you will be exited in any case but you might not get the best price.

A stop limit order has two prices (stop and limit), when the stop price is penetrated, a limit order is submitted (sell at limit for a long position). This means sell only at the price (limit) you want or better. Of course this has the added risk of not executing if the price moves away from your limit but can get you better price.

Each one is suitable for a specific scenario depending on your strategy and the instrument.

Stop orders can be used both for exiting and entering positions. So if you'd like to enter only if the price is higher than X, use a buy stop (long position). If you'd like to enter only if the price is higher than X (stop) but not higher than Y (limit), use a buy stop limit (long position).

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