Stop orders

A stop order is a type of order used to buy or sell securities when the market price reaches a specified value, known as the stop price.

Stop orders are also often known as “stop-loss orders” because they’re generally used to limit losses or protect profits, and are very commonly used to protect short positions which can have extremely high loss potential. You can think of them as the emergency brakes on an elevator–they’re there to trigger in case of any sudden, unexpected movement.

Placing a stop order

Placing a stop order is just as easy as placing a standard limit order. Just follow the standard steps for order entry, and select “Stop” from the Order type drop-down:

Once “Stop” is selected, enter the stop price, and click buy or sell.

Example 1 (sell-stop) - Long positions

Let’s say you own shares that are trading at $10, but you think there’s a chance that the price will drop sharply and want to sell your position if the price hits $9. In this case, you might place a stop-sell order for $9 so that, if the stock price drops to $9, the stop-sell will trigger and automatically execute a market order to sell the shares immediately, limiting your potential losses if the share price continues to fall.

Similarly, let’s say your $10 shares have seen an exceptional quarter and jumped to $15, but you’re not sure if they will keep their value. In this case, you might want to set a point at which you’d like to sell your shares to protect your profits if it starts to drift back to its old price. In this case, you might set a stop-sell order for whatever price point you’d like to sell–let’s say for example $12, to keep a 20% gain over your initial investment. As with the example above, if the stock price falls below the $12 threshold, the stop-sell order will trigger and automatically execute a market order to sell the shares immediately, protecting the remaining profit if the share price continues to fall.

Example 2 (buy-stop) - Short positions

Suppose you short a stock valued at $20 as you anticipate its price to decline in value in the near future, but you’re nervous about the high risk potential that comes with short stocks, and want to limit your loss potential to about $2 per share shorted. In this case, you can place a stop-buy order at $22. That way, if the stock climbs to or shoots past $22, the stop-sell order will trigger and automatically execute a market order to buy back those shares immediately, settling your short position.

A word of caution about stop orders

As with everything in investing, stop orders are not guaranteed to always work in your favour. While stop orders can be very helpful, it’s important to understand that the orders will trigger once you hit the price, regardless of context. Due to the unpredictable nature of the markets, it’s possible for a share that is gaining in the long-run to experience a short-term price dip that triggers a sell-stop order, or for a share that is losing value to experience a short-term bump that triggers a buy-stop order.

It’s important to treat stop order targets like all your other investing decisions: applying an appropriate level of forethought and research can help you to make sure your stop orders function as intended.

Finally, you should keep in mind that a stop order will trigger a market order, which sells at the best available price no matter what that price might be. Sometimes, especially with particularly volatile securities, the ‘best available price’ might be different from your stop price. If you would like to set a minimum price you’re willing to settle on a stop order, you may want to consider a stop-limit order.

Synthetic order triggering:

Stop orders are considered to be synthetic orders because they technically don’t exist on the market. They only exist on our servers, waiting to be triggered. As such, they’re triggered by the data we’re given by the markets, and not the markets themselves. To make sure that your order isn’t triggered by faulty data, every Questrade account has a synthetic order triggering setting that will not execute a stop order until there are 3 prints (or filled orders) at that price.

While synthetic order triggering is set for your protection, you can change it in the user preferences of the Edge Desktop platform. Please remember that this is an account-wide setting, and cannot be changed for individual orders.

Important to know:

• Stop orders are not allowed on Canadian exchanges. If you wish to place a stop order on a Canadian security, you may need to use a stop-limit order.
• When placing a stop order, you’re required to specify your order duration.
• Stop (loss) orders are only valid during regular market hours. After-hours price movements will not 'trigger' your stop order.
• Stop orders cannot be used with the GTEM order duration for pre- or post-market trading