What is a Stop order? Learn how to use it effectively

What is a stop order?? How to use stop orders effectively to manage your positions without having to constantly monitor the market and trade frequently

What is a Stop Order?

Stop Order is a type of trading order designed to execute a purchase or sale of an asset when the market price reaches a predetermined price, called a stop price. When the asset price reaches the stop price, this order will automatically convert to a market order (Market Order) and are matched at the best available price.

This type of order is commonly used by professional investors to:

• Protect the profits already made.
• Limit losses in situations where the market moves against your predictions.
• Open a new trading position when the asset price crosses the stop price level.

The highlight of Stop Order is automation, which helps investors reduce the pressure of having to constantly monitor the market and make timely decisions.

What is a Stop Order in derivatives?

Command Stop Order (also known as a stop order) in derivatives trading is a type of order used to buy or sell an asset when the price reaches a specific level, known as a stop price (stop price). This is a useful tool for investors to control risks or take advantage of market opportunities.

Types of Stop Orders

1. Stop Loss Order:
   • Used to minimize the risk of loss when the market moves against your prediction.
   • For example, if you are holding a contract and the market price drops to the stop price you have set, a sell order will be triggered to limit your loss.
2. Stop Buy Order:
   • Used to open a position when the price rises to a specific level, indicating that the market trend may continue to rise.
   • For example, if you predict that the price will continue to rise sharply after breaking through a resistance level, you can place a buy order at the stop price.

How Stop Order Works

• When the market price reaches the stop price, the Stop Order will automatically convert to a market order or a limit order depending on the initial setting.
• This ensures quick order execution, but also runs the risk of slippage if the market moves sharply.

Advantages of Stop Order

• Capital protection: Minimize the risk of loss by automatically closing positions when the market is unfavorable.
• Take advantage of the opportunity: Buy or sell when the market reaches your desired price without constant monitoring.

Disadvantages of Stop Order

• Slippage: Orders may be filled at a worse price due to rapid market fluctuations.
• Not suitable for illiquid markets: In some cases, the stop price may be ignored.

Stop Order is an important tool to help investors manage risks and strategies more effectively in derivatives trading.

How to use Stop Order

Implementation mechanism:

1. The investor sets a stop price (Trigger Price) at which the command will be activated.
2. When the market price reaches or crosses the stop price, the Stop Order will convert to a market order.
3. The order is then executed at the best price available on the market.

For example:

• Buy Stop Order: Set at a price higher than the current price of the asset. When the price crosses the stop level, the order will be triggered to buy.
• Sell Stop Order: Set at a price lower than the current price of the asset. When the price drops to the stop level, the order will be triggered to sell.

Common types of Stop Orders

1. Basic Stop Order (STP)
This is the simplest and most common command used on Vietnam stock exchange. Investors simply set a stop price, and when the price reaches this level, the order will be converted to a market order.

For example:

• An investor owns stock A at a purchase price of VND50,000/share. To protect their profits, they place a stop-sell order at VND55,000/share. When the market price drops to VND55,000, the order will be triggered to sell.

2. Stop Limit Order (STL)
This order combines a stop order and a limit order (Limit Order). The investor sets two prices:

• Stop Price: The price at which the order is triggered.
• Limit price: The maximum or minimum price an investor is willing to trade.

This type of order helps reduce the risk of being filled at an undesirable price, especially in volatile market situations. However, if the market price is not within the range, the order may not be filled.

3. Stop Loss Order
This is the most common type of stop order, often used to limit losses when the market moves against predictions.

For example:

• An investor buys stock B for VND100,000 and places a stop-loss order at VND90,000. When the market price drops to VND90,000, the order will be triggered to sell, minimizing the loss.

4. Buy Stop and Sell Stop Orders

• Buy Stop: Used to buy when the asset price exceeds a certain level, often applied in trend trading strategies (breakout trading).
• Sell Stop: Used to sell when the asset price falls to a certain level, to protect profits or limit losses.

Advantages of Stop Order

1. Save time and effort when investing:
   Stop Orders are automatically triggered when the market reaches the stop price, eliminating the need for investors to constantly monitor price movements.
2. Minimize emotional risk:
   By setting exit prices, investors can maintain a neutral mindset and avoid emotional decisions during volatile markets.
3. Protect profits and limit losses for investors:
   Stop orders allow investors to lock in profits that have been made or prevent losses from exceeding an acceptable level.
4. Optimize trading strategies for investors:
   Stop Orders help investors execute complex trading strategies, such as trend trading or breakout trading, without having to be present at the moment the market reaches a key price level.
5. Suitable for many types of investment assets:
   Stop Orders can be applied in stocks, commodities, forex and even cryptocurrencies where intraday price fluctuations are common.

Disadvantages of Stop Order

1. No guarantee of matching stop price:
   When market prices fluctuate strongly or there is a price gap (price gap), the stop order may be executed at a price far different from the set stop price.
2. Missed opportunity when the market reverses:
   If the market price fluctuates only temporarily and then reverses, the stop order may be triggered unnecessarily, causing the investor to lose potential profits.
3. Impact of market psychology when investing:
   When too many investors use stop orders on the same asset, the market can become distorted, leading to unnatural movements.

Basic terminology related to Stop Order

1. Order Price (OP):
   A preset price level that, when reached, will trigger the stop order.
2. Trigger Price (TP):
   The market price is compared to the stop price to determine the trigger condition.
3. Order validity:
   Stop orders can be effective during the day (Day Order), forever (Good Till Cancel – GTC) or at a certain time (Date/Time Order).
4. Order cancellation/modification principles:
   Stop orders can only be canceled or modified before they are triggered. Once triggered, the order will follow the cancellation/modification rules of regular market orders.

How to place a Stop Order

The process of placing a stop order is very simple and easy to follow:

1. Enter the stop price (and limit price if using a stop limit order).
2. Please enter the amount of assets you want to trade.
3. Select order type: STP or STL.
4. Set order validity (Day, GTC, Date/Time).
5. Click confirm to complete.

Difference between Stop Order and TCO

Stop Order and Trailing Stop Order (TCO) Both are risk management tools, but have different operating mechanisms and purposes:

1. How it works:
   • Stop Order: The stop price is a fixed level. When the market price touches or crosses the stop price, the order is triggered and converted into a market or limit order.
     For example: Place a sell order with a stop price of $50, the order will trigger when the price drops to $50.
   • TCO: The stop price automatically changes according to the market price, based on a fixed distance (trailing distance).
     For example: Place a sell TCO with a trailing distance of $5, if the price rises to $100, the stop price will be $95. When the price falls below $95, the order is triggered.
2. Intended use:
   • Stop Order: Protect capital or trigger a trade when the market reaches a fixed price.
   • TCO: Optimize profits by tracking price trends, while protecting capital when the market reverses.
3. Advantage:
   • Stop Order: Simple, suitable for short term trading.
   • TCO: Flexible, helping investors lock in profits in an uptrend.
4. Disadvantages:
   • Stop Order: Failure to capitalize on favorable trend after reaching stop price.
   • TCO: May be triggered early in volatile markets.

What is a Stop Order?

Conditional command Stop Order is an order placed to buy or sell an asset when the market price reaches a certain level. specific stop price. This is a popular tool in derivatives, stocks and forex trading, helping investors automate transactions according to predetermined conditions.

How it works:

• When the market price reaches stop price (stop price), the order will be triggered and converted into one of two types:
  1. Market Order: Orders are executed immediately at current market price.
  2. Limit Order: The order is only executed at a limit price better than or equal to the set price.

Intended use:

1. Capital Protection (Stop Loss):
   • Minimize the risk of loss when the market moves against your predictions.
   • For example: Place a stop sell order at $50, if the price drops to this level the order will be triggered to limit losses.
2. Take advantage of the opportunity (Stop Buy):
   • Open position when price breaks above resistance, indicating strong uptrend.
   • For example: Place a buy stop order at $100, which will trigger if the price breaks above this level.

Advantage:

• Support for automated trading: No need to monitor the market constantly.
• Risk Management: Close positions at the right time when market conditions are unfavorable.

Disadvantages:

• Slippage: Orders may be filled at a worse price due to high volatility.
• Not suitable for illiquid markets.

Stop Order Conditional Order Helps investors control risks effectively and optimize trading strategies.

Conclude

Stop Order is an important tool for investors to protect profits and limit risks in trading. Although there are some limitations, when combined with other trading strategies, this type of order is highly effective and supports scientific asset management. HVA Group Hopefully through this article investors have found the answer to the question. What is a stop order?? Investors should understand how stop orders work to make smart decisions in the market.

For optimal results, investors should combine stop orders with other tools such as limit orders or specific trading strategies. Like any financial tool, stop orders are not a perfect solution, but when applied correctly, they can become a powerful assistant to help you conquer the market.