A Stop Order is an automated trade that is intended to expire at a future date.
A trader will enter in a Stop Order that will automatically sell his position in a security when a set price is reached. For example, if a trader has a long position of 10 call options contracts of Apple (AAPL – NASDAQ) he can preprogram his trading platform to close out the entire position if the calls price fall below a certain value. In this way the Stop Order can be used by the trader to lock in the gains of a profitable trade before the gains are lost because the price falls. At the same time the trader can use a Stop Order to limit his losses to a percentage of the trade. In this way, the Stop Order would be entered at the time of the trade, and the Stop Order price would be set at 2% to 5% of the value of the trading account. In this way the Stop Order is used by traders as a risk management tool.