What is a Stop Sell Order? What You Need to Know

Brokers in the capital markets offer a wide array of market orders that allow traders to be more specific about how trades are filled in the market. A stop sell order is one such order that allows traders to specify how short or sell positions get filed.

In its purest form, a stop sell order is a market order that allows traders to enter short or sell positions on price, moving lower to a given level. In this case, a trade is only filled on price, dropping from the current market price.

Unlike a limit order, stop order, be it buy or sell, cannot be seen by the market until it is filled. The order is common with investors who, for one reason or another, may not be available to open a position. It is also a popular order for trading volatile securities such as cryptocurrencies.

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The order also finds excellent use in trading expected breakdowns. Price breaking through a support level signal increasing selling pressure paving the way for traders to profit from downside action. Therefore, a trader would be able to ride any wave on the downside by placing the stop order below the support level.

How to use Stop Sell order

The market order works best by first identifying support level that tends to offer support to price as it tries to move lower.

Once a support level forms, it is important to wait for a buildup of price action around the level, signaling a buildup of selling pressure.

The sell stop order is conversely placed slightly below the support level. The order should be placed a safe distance away to avoid being stopped by false breakdowns.

Once the order is filled, a stop-loss order could be placed above the support level to protect the position from any upside movement in case of a false breakout.

Example

Consider GBP/USD is trading at $1.1256. A trader looking to short the currency pair could place a sell stop order at $1.1240. The sell order would get filled as soon as price drops to the $1.1240 level.

Similarly, if you wish to enter a short position on Google stock trading at $1400, you could place a stop order at $1350. As soon as price drops to the $1350 level, the stop order would get filled, opening a position to profit from additional downside action.

Sell Stop Order Benefits

Traders who leverage stop orders do so to avoid missing on trades whenever the price is expected to continue edging lower. Similarly, it ensures traders don’t chase prices whenever things get overstretched.

The stop order also makes it possible to plan ahead and short at a much better risk to reward level. Likewise, the order relieves the burden of having to stay glued to the screen, waiting for the price to drop below a given support level to open a short position. Similarly, it goes a long way in making trading less emotional.

Drawbacks

One of the biggest of drawbacks of the stop order is that it does not guarantee a profitable trade. The fact that the order can be triggered on a false breakdown could also result in the accumulation of losses on prices bouncing back immediately.

Conclusion ‘

A stop sell order is an ideal market order for automating trading activities when trying to profit on prices dropping in the market. The order is especially useful when dealing with volatile assets or when one does not have much time to spend glued to the screen.