A stop order is an order commonly used in futures trading to either help protect losses, lock in profits, or enter a market on a breakout. A buy stop order is placed above where the market is trading, while a sell stop order is placed below where the market is trading. To illustrate when and how a stop order could be used, we will use the Depth of Market, a feature on the dt Pro platform, and we’ll and the follow the steps below for May 14 Corn.
- Let’s imagine that a trader is long at 4.7675 and would like to place an order to Sell 1 May 14 Corn on a Stop at 4.7500 to protect losses in the event that the market sells off.
- Once the market trades down to 4.7500, the stop order will turn into a market order.
- If there is a bid to meet the asking price of 4.7500, the stop order will be filled. If there is not a bid at 4.7500 to fill the order, the stop order will be filled at the next price where there is a bid to meet the asking price.
STOP ORDERS DO NOT NECESSARILY LIMIT YOUR LOSS TO THE STOP PRICE BECAUSE STOP ORDERS, IF THE PRICE IS HIT, BECOME MARKET ORDERS AND, DEPENDING ON MARKET CONDITIONS, THE ACTUAL FILL PRICE CAN BE DIFFERENT FROM THE STOP PRICE. IF A MARKET REACHED ITS DAILY PRICE FLUCTUATION LIMIT, A "LIMIT MOVE", IT MAY BE IMPOSSIBLE TO EXECUTE A STOP LOSS ORDER.
If the bids remain the same as shown below the trader should be filled at his desired exit price of 4.7500. However, stop orders often do not get filled at the executed price due to a lack of liquidity or a fast moving market, because there are not enough bids to accept the stop order price.
Once again, it is important to understand that trades may be filled at a different price from the price an order is executed when using a stop order. This concept is known as slippage and is primarily caused due to a lack of liquidity in a market where there are not enough bids or offers at a trader’s executed stop order price to get filled. It may also happen in liquid markets that are moving too fast to fill the stop order. It is perfectly normal for slippage to occur, especially in illiquid markets.
If we take a look at the Depth of Market below, we can visualize how slippage occurs. Let’s imagine that a trader has an order to sell 1 July 14 Oats at 3.8900 on a stop to protect against a long position in the market. If the bids and offers remain the same as shown below, the trader who places this order may get filled at the next bid of 3.8725, or may not depending on what other traders have orders working in the market and the time other traders placed those orders.
To help manage risk in illiquid markets, the exchanges use what is known as Stop with Protection on all stop orders. The CME Group defines Stop with Protection as, “a stop limit order (an order in which a trader may define a stop price as well as a limit price) with the limit price calculated based on the trigger price and the protected range.” The CME Group defines the protected range as the trigger price plus or minus 50 percent of the non-reviewable trading range for that product. The non-reviewable trading range is a defined range for each futures market and can be found in the following document: Globex Non-Reviewable Trading Ranges – CME Group. A stop with protection ultimately turns each stop order into a limit order to help trades from either being filled too far from the trigger price or not getting filled at all.
STOP ORDERS DO NOT NECESSARILY LIMIT YOUR LOSS TO THE STOP PRICE BECAUSE STOP ORDERS, IF THE PRICE IS HIT, BECOME MARKET ORDERS AND, DEPENDING ON MARKET CONDITIONS, THE ACTUAL FILL PRICE CAN BE DIFFERENT FROM THE STOP PRICE. IF A MARKET REACHED ITS DAILY PRICE FLUCTUATION LIMIT, A "LIMIT MOVE", IT MAY BE IMPOSSIBLE TO EXECUTE A STOP LOSS ORDER.
One of the downsides of Stop with Protection is that the market may trade outside of the protected range without filling a trader’s stop order or limit order. This scenario would be an example of “stop jumping” and can result in one’s stop order never getting filled. Stop jumping occurs when there are no bids or offers to accept a stop order at or beyond the stop order price.
To illustrate stop jumping, let’s use an example. Let’s imagine that a trader places a stop order to Sell 1 July Oats at 3.8900. If we view the non-reviewable trading ranges in the guide above, we will see that the protected range for oats is 10 cents. This means that the exchange will place a limit order 10 cents under our stop order of 3.8900 (at 3.7900) once we execute the order. Because a limit order indicates that an order will only be filled if the market trades at the limit price or better, our order will not be filled at any price less than 3.7900. In this case, if the bids and offers remain the same as shown in the Depth of Market below, and we do not get filled at the 3.8725 (the only bid below our order) and there are no bids to accept our order between 3.8900 and 3.7900, our stop order would have been “jumped”. In this example, our order would not be filled until the market rallies back to 3.7900 or greater and there is a bid to accept our order.
It is extremely important for traders to understand that stop orders are not promised a fill at the price in which they are executed. It is equally important for trader’s to understand that, in the event that a stop order is jumped, the order may never be filled. Ultimately, traders must be aware of the liquidity in the market in which they are trading, so that they have an understanding of the possible outcomes of fill prices.
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Risk Disclosure
STOP ORDERS DO NOT NECESSARILY LIMIT YOUR LOSS TO THE STOP PRICE BECAUSE STOP ORDERS, IF THE PRICE IS HIT, BECOME MARKET ORDERS AND, DEPENDING ON MARKET CONDITIONS, THE ACTUAL FILL PRICE CAN BE DIFFERENT FROM THE STOP PRICE. IF A MARKET REACHED ITS DAILY PRICE FLUCTUATION LIMIT, A "LIMIT MOVE", IT MAY BE IMPOSSIBLE TO EXECUTE A STOP LOSS ORDER.
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