From Traderpedia

Definition: A buy or sell order which is not to be executed until the market price reaches the customer's defined price, known as the stop price. When this occurs, it becomes a market order.

A stop order is used to sell at a certain level below current market price or buy at a certain level above it. Depending on the stop trigger method used, the level is treated as "hit" either when:

• a trade takes place there (known as "last") or
• the bid/offer is quoted there.

In most cases, once a stop has been triggered it becomes a market order.

[edit] Application

A stop order is used to either protect profits (known as a trailing stop), limit losses (known as a stop loss) or enter the market (known as a stop entry). Stop orders can also be placed as part of a bracket order, such as an OCO or OCA.

A stop order may be subject to slippage and is not guaranteed to be filled at the chosen price, except in the case of spread betting firms' "guaranteed stops" which are part of their controlled risk bets.

[edit] Examples

Imagine the offer price of an instrument is 10000.

Trader A buys 1 futures contract and places a stop loss order to sell if the price drops to 9995.

Trader B had already bought at 9980 and now places a trailing stop sell order at 9995 to lock in some profit.

Trader C places a stop buy order at 10005 which will only be filled if the price trades up to that level. The market rises swiftly through 10005 and he is filled at 10007.