A Stop Order typically comes in two flavors:  a stop loss which turns into a market order when price goes below it, and stop limit which turns into a limit order for the stop price. 

A Stop order may be either a buy or a sell.     It may be used to enter or exit a position. 

Check with your broker for the exact commands to use for your own trading. 

Extra Insight:

The stop order is typically thought of for exiting a trade, however, it can also initiate a trade.   For example, a trader buying on new highs may set a buy stop slightly above the current high.   If the price hits the new high, the stop is triggered and the buy order executes.    In this case, the cool guys say the stop was “lifted”.

Many traders use a stop order to cut losses.   Some traders also “trail” the stop by moving up the stop trigger as the stock price goes up to protect partial profits.

In backtesting, I do not use the stop limit order, just the regular stop order.    The historical price data cannot show the potential effect of our stop might on a live market — that is a known inaccuracy.   Even so, backtesting can show the benefits and trade-offs of using stop orders.

Click here for BackTesting Reports on Stop Losses

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Updated 11/13/08.

Tags: backtesting, data, entry, exit, loss, protect profits, stop, trading