It wakes when price moves through a line:then trades at market, by design.
An order that becomes a market order once the price reaches a specified level: a buy stop is placed above the current price and a sell stop below it.
Once triggered it is filled at the best price then available, which can differ from the level set, especially in a fast market or after a gap.
In plain words
A stop order is an instruction to open a trade only if the price reaches a level beyond the current one: a buy stop is placed above the current price and a sell stop below it. When the level is reached the order becomes a market order and is filled at the best price then available.
See it move
Current price has reached Buy stop
Why it matters
It lets a trader enter only if the market first moves in the chosen direction, for example through a level it has failed to pass before. Because the fill happens at the market, the price obtained can differ from the level set, especially in a fast move.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
EUR/USD trades at 1.1000, and a trader places a buy stop at 1.1050 and a sell stop at 1.0950.
- 1The buy stop is 50 pips above the price and the sell stop is 50 pips below it.
- 2If the buying price reaches 1.1050 the buy stop is triggered and becomes a market order.
- 3If the market is moving quickly and the fill is 1.1052, the slippage is 2 pips.
The order waits unused until its level is touched and then buys at the market, here at 1.1052 and not 1.1050.
A common mistake
A stop order is often confused with a limit order. A limit order waits for a better price (buying lower, selling higher) and does not fill at a worse one; a stop order waits for a higher price to buy or a lower price to sell and, once triggered, accepts the market price.
Check yourself
Educational information, not investment advice or a recommendation to trade.