Used to protect a position you already hold. If the stock falls to your stop price, the order activates and tries to exit at your limit price or better. Your stop price is set below the current price.
Example:
You own TSLA, currently trading at $200. You set a sell with stop price $190 (Trigger level) and Limit price $185 (Min you'll accept)
- TSLA trades above $190 - your order sits dormant, your position is untouched
- A trade prints at $190 or below - the stop price is elected and your order converts to a limit sell at $185
- The limit order fills at $185 or higher - or stays open if the market gaps below $185 before a buyer is found
If the price reverses
If TSLA dips to $190, triggers your order, then bounces back to $200 - your sell limit at $185 is now live while the stock has recovered. Since a sell limit fills at $185 or higher, it may fill at the recovered price. If you want to keep the position, cancel the order immediately after the reversal.