A stop order is usually placed ahead of the price in the intended direction. When the price reaches the stop price, the stop order becomes a normal market order. The Stop Order and Its PlacementĪ stop order is an order to buy or sell a security when the price reaches the specified price level, known as the stop price. The stop loss order is nothing but a stop order - in the opposite direction to trade entry - placed at a fixed distance away from the price level where the trade was entered. To manage the risk of adverse price movement, a trader normally places a stop loss order when entering a trade. In other words, to close a long position, the trader must place an equal sell order in the market. To understand how the trailing stop works, we need to understand how a trade is closed and how the stop loss order works.Ĭlosing a trade requires an equal but opposite order. A trailing stop functions as a stop loss order, but instead of staying at a fixed point, it moves with the price as long as the price is moving in a favorable direction.
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