A stop order is a type of order used by traders to buy or sell an asset once its price reaches a specified level, known as the stop price. This mechanism is typically employed to minimize losses or to enter a position in the market when the price moves in a favorable direction. Once the stop price is triggered, the stop order becomes a market order and is executed at the prevailing market price.
Stop orders are commonly used in various markets, including Forex, stocks, and futures. There are two main types of stop orders: a stop-loss order, which is used to limit potential losses on a position, and a stop-limit order, which adds a limit price to the execution process. Understanding how stop orders function is crucial for risk management and strategic trading.