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A simple stop order is an order to buy or sell stock, once a predetermined price is traded at or through. Buy stop orders are placed above the current price of the stock and sell stop orders are placed below the current price of the stock. Once the stop price is hit the buy or sell action becomes a market order, enabling the trade to be executed at the current market price.

There are as many ways to determine the position of your stop orders as there are traders in the marketplace. Most stop orders are placed according to a specific price, dollar move or percentage move, with 8% being one of the most common.

When placing a stop order it is important that the order be placed close enough to the current price to prevent a loss but far enough away to stay out of the stocks current range. The goal of the stop order is to prevent losses during major market swings, not to keep pulling you out of your trading strategy on simple trading range swings.

A good rule of thumb to remember is to place your sell stop orders below current support levels so that you will have multiple levels of protection in place. When buying, you will want to place your buy stop orders above current resistance levels so that the stop is only activated if the stock is making a strong upward move.

Placing your stop orders will require a certain amount of study of the stocks current trading range. Exactly where to place your stop orders will mostly be a matter of personal choice, based on your current analysis of the stocks trading range.

Stop orders should be an integral part of every trading strategy. When used correctly the sell stop order can be a useful and powerful protection tool when profit is involved. It can also be used to safeguard your positions in the event of a strong price reversal of your position.