# Stop order

Stop order is an instruction that becomes a market order when a specified stop price is reached, so its execution price can differ from the stop price.

## What it means

A stop order stays inactive until its stop price is triggered. It then becomes a market order, which seeks execution at the available market price. The stop price is a trigger, not a guaranteed fill price.

A **sell stop** is generally placed below the current market price; a **buy stop** is generally placed above it. A sell stop may be used to limit exposure after a decline, while a buy stop may be used to enter after a rise or to close a short position. Neither type guarantees that a loss will be limited to a chosen amount.

A broker or trading venue determines the precise triggering rule, such as whether it uses a trade price or a quotation. Check that rule, along with the order's time-in-force, before submitting it. A stop order differs from a stop-limit order: once triggered, a stop-limit order becomes a limit order rather than a market order.

## How it is calculated

A stop order has no formula that calculates its execution price. For a simple trigger illustration, let `P_ref` be the price used under the broker's triggering rule, in US$ per share, and `P_stop` be the selected stop price, also in US$ per share:

- Sell-stop trigger: `P_ref <= P_stop`
- Buy-stop trigger: `P_ref >= P_stop`

These comparisons illustrate the direction of a trigger; the broker's actual rule controls when it occurs. After activation, the fill price depends on available liquidity and any price movement. To measure the difference afterward, use `Fill difference = |P_fill - P_stop| × Q`, where `P_fill` is the fill price in US$ per share and `Q` is the number of shares filled. The result is in US$. It measures distance from the stop price, not the investor's total gain or loss; for a partial fill, calculate using the shares actually filled.

## Worked example

Suppose, hypothetically, that a stock trades at US$50 per share and an investor places a sell-stop order for 100 shares with a US$48 stop price.

1. While the broker's reference price remains above US$48, the order has not triggered.
2. Suppose the reference price reaches US$48 under the broker's rule. The stop activates, and the order becomes a market sell order for 100 shares.
3. Suppose the available market allows all 100 shares to fill at US$47.80. Proceeds are `100 × US$47.80 = US$4,780`, before any fees.
4. The difference from the stop price is `|US$47.80 - US$48.00| × 100 = US$20`. A fill at US$48 would instead have produced US$4,800, before fees.

If the stock gaps past US$48 and the first available price is much lower, the fill could be farther from the stop. This example does not imply that any particular fill is likely.

## Why it matters before you trade

A stop order separates **when an order activates** from **the price at which it executes**. That distinction matters most when prices move quickly, liquidity is thin, or trading resumes after a halt or overnight gap. A market order created by the trigger may fill across several prices or only partly if available liquidity is insufficient.

Before placing an order, a pre-trade check can distinguish the intended stop price from the potential execution cost. Relevant inputs include the bid-ask spread, order size relative to daily volume, volatility and market impact. None of these makes a stop price a guaranteed exit price. Order availability and triggering rules can also differ by broker and market.

## How PreTrAIde uses it

PreTrAIde's stated product facts do not say that it places, monitors or specifically models stop orders. Its pre-trade analysis lets a user specify execution conditions for each stock in a basket and assesses factors such as estimated spread, participation in daily volume, market impact and volatility. It returns a GO, NO-GO or MODIFY verdict with reasoning and a suggested execution strategy as decision support, not an order instruction. Users place orders themselves with their own broker; PreTrAIde never receives, transmits or executes them.

## Common mistakes

- **Treating the stop price as a floor or ceiling for the fill.** A triggered market order can execute at a worse price, particularly after a gap.
- **Confusing a stop order with a stop-limit order.** A stop-limit order controls its limit price but may remain unfilled.
- **Assuming every broker uses the same trigger.** Confirm which price activates the order and whether it is eligible outside regular market hours.
- **Ignoring partial fills and costs.** A trigger does not ensure an immediate, complete fill at one price; spreads and any applicable fees also affect the outcome.

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Source: https://pretraide.com/glossary/stop-order