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bounce back up, but by then it would be too late as your order would have already executed. As you can see you cannot achieve this with market or limit orders. For example, setting a limit order to sell your stock at $45 while the stock is trading at $50 would result in an immediate execution of your sell order at $50 per share. The stop order on the other hand is like a watch dog. If the stock is stable or moving in the favorable direction nothing happens. The stop order executes when the stock is moving in an adverse direction and finally hits your specified stop price.

A stop buy order works in exactly the opposite way of the stop sell order. Suppose you want to buy a stock only when the stock price reaches up to a certain value. Then you would enter a stop buy order for that stock and specify the value at which the order should become active. If the stock rises and that value is reached, your buy order becomes a market order and it is executed. As you might have figured already, the stop price for sell orders must always be below while the stop price for buy orders must always be above the current market price of the stock. Otherwise your order would have no meaning and it is not accepted by the broker.

A stop limit order works in exactly the same way as the stop order with one difference. When the stop price is reached, your order becomes a limit order rather than a market order. So when you enter a stop limit order you have to specify the stop price as well as a limit price. Many brokers, however, require that your stop and limit price for a stop limit order be exactly the same. Let's take an example. Ford stock is currently trading at $50 per share. You place a stop limit order to buy shares of Ford at the stop price of $52 per share and limit of $52 per share. Your order would remain inactive so long as the stock price remains below $52. As soon the stock reaches or exceeds $52 per share, your order awakens with the buy limit order of $52 per share. Of course if the stock quickly continues beyond $52 per share (with your order …