Stop market orders are a more complex variant of market orders. A condition, the so-called trigger, is added to the market order. Traders that want to place a stop market order enter the price where the market order needs to be executed in the “stop price” field. If price rises (in the case of a buy order) or falls (in case of a sell order) to the previously defined level, a market order is activated and then executed at the best price available. The executed price can vary greatly depending on market conditions as strong movements in either direction can create slippage.
This order type is used predominantly when market participants are waiting for a price level that they would expect to result in higher (in case of stop market buys) or lower (in case of stop market sells) prices.
Consequently, stop market orders are an important piece of so-called “break out trading” and risk management. After traders assumed their position and defined a price under or above their loss would become too high or their thesis would be invalidated, they place a stop market order that would automatically close their position if that price point is reached.