In this article, we will explain what the concept of a Sell Stop is.
When trading in the financial markets, there are basically two ways to open a trade – immediate execution and pending order. With a pending order, your trade is opened as soon as the market reaches the level you have selected.
A Sell Stop order can apply to stocks, derivatives, forex or a variety of other tradable instruments. A Sell Stop order can serve a variety of purposes with the basic assumption that a stock price that falls to a certain level will continue to fall.
Sell Stop is placed below the current market price.
Sell Stop order is most often considered as a tool to protect against potentially unlimited losses of an uncovered long position. The investor is willing to open this position to bet that the price of the security will fall.
The seller of a long position can place his Sell Stop at a Stop Price or Execution Price either lower or higher than the point at which he opened his long position. If the price has fallen significantly and the investor is trying to protect his profitable position from a subsequent move down, he can place a Sell Stop above the original opening price. An investor who is merely trying to protect himself from a catastrophic loss from a significant move downward will open a Sell Stop order below the original short sale price.
We use it most often when we want to trade a support breakdown and speculate on a continuing down trend.
Imagine an ABC stock price that is ready to break out of its trading range between $10 and $12. Let’s say a trader bets on the price falling below this range for ABC and places a Sell Stop order at $9. Once the stock reaches this price, the order becomes a market order.
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