In what market condition would a sell stop order typically be placed?

A sell stop order is typically placed in a market condition where the price is falling. This type of order is used by investors to limit potential losses from a declining position. When an investor anticipates that the price of a security will continue to decrease but wants to avoid deeper losses, they can set a sell stop order at a specific price below the current market price. If the security reaches that stop price, the sell stop order is triggered, converting it into a market order and facilitating the sale of the security.

This strategy is particularly effective in a downtrending market as it allows an investor to protect themselves from further declines by automatically selling their shares if the price drops to their predetermined level. In contrast to other scenarios—such as when the price is rising or stable—placing a sell stop order makes the most sense during a price decline when the threat of continued downturn is perceived.