Stop order definition

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What is a stop order?

A stop order is an instruction to your broker to execute a trade if the market price moves past a particular level: one which is less favourable than the current market price. The meaning of a stop order is the opposite of a limit order, which instructs your broker to buy or sell an asset at a particular price that is more favourable than the current market price.

Example of a stop order

There are two types of stop orders: stop-loss orders and stop-entry orders.

A stop-loss order can be used to limit risk, by automatically closing a position once it reaches a certain level of loss. There are a variety of types of stop-loss order, including a basic stop-loss, a trailing stop-loss and a guaranteed stop.

The second type is stop-entry orders, which are used to take advantage of market movements by opening a position when a market drops to a certain level. They are commonly used to make sure that traders do not miss opportunities to enter and exit trades while they cannot monitor markets.

When trading with IG, stop orders and limit orders are referred to simply as stops and limits, and they are a built-in feature of our trading platform.

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Pros and cons of stop orders

Pros of stop orders

Using a stop order is a great way to manage your positions without having to constantly monitor the markets and be there at the exact moment of execution. The key is to choose a stop order level that allows your asset to fluctuate in price while still protecting you from downside risk.

Stop orders also help you trade without the risk of emotional influences. By setting your exit level and automating your trade, you can remain neutral – meaning there is no risk of you keeping your position open in the hope that the asset will bounce back in price, while accumulating unnecessary losses on your position.

Cons of stop orders

When selecting your stop order level, it is important to realise that this is no guarantee of execution – basic stop orders can incur slippage when opening and closing positions if there are large movements or gaps in the market. So, if your level is reached, your stop order will be filled at the best available market price, which could be different from your desired price.

If you elect to use a stop order, and the market movement is only temporary, you may lose out on potential profit. For example, if your stop-loss order closes out your position only for the market to rise in value again, your trade would have closed out at a loss before it had the chance to return to profit.

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