Stop Orders

I have been reading different threads on this site for about 3 weeks trying to help me formulate my game plan for getting into swing trading. Twixt and Tween the BS and humor there has been some really helpful information from many who have been around the block many, many times. For all those who have posted I thank you, it has really been helpful and sometimes humorous for a newbie.

My experience with on-line brokers over the last 3-4 years has been placing market buy and sell orders only. “Minimize your loses” appears to be paramount for all traders. Now I need to understand the mechanics of the stop orders. Should I use Stop Market or Stop Limit, or ? Thank you in advance for your response.

 

For a stop loss type order, you should use a stop market order. With a stop limit order the market could jump over you limit order and then it becomes a non marketable order and it will not get you out of the position. With a stop market order it will get you out of the position with a market order. Which is what you would want for capital protection. You will probably get filled at a little worse price that your stop, because of the spread, or a fast market, but you will get out and won't be riding a losing position.

PS, I learned this lesson the hard way, so I hope you won't have too!!!

Kyle

 

Examples
Limit order- Stock is at $24.50. It's still too expensive but you want to buy it if it gets down to $24.20. You place a limit order to buy at $24.20. If it gets down to $24.20 your limit order will execute and you'll own it.

Stop order- You own a stock at $24.20. If it gets down to $23.50 you want to get rid of it (don't want to check on it in a week and find out it's now worth $5.00/share). You place a stop order(good till cancelled "GTC") to sell at $23.50. If it gets down to $23.50 your stop order will execute and you won't own it anymore.

Stop/Limit order- You own a stock at $24.20. If it gets down to $23.50 you want to get rid of it (don't want to check on it in a week and find out it's now worth $5.00/share). You place a Stop/Limit order(good till cancelled "GTC") to sell at $23.50, limit $23.00. If it gets down to $23.50 your Stop/Limit order will execute and sell at $23.00 or better and you won't own it anymore. You always get the best price so if it is a NASDAQ stock you'll probably get $23.50 for it. If it has been trading at say $23.90 at the close and opens the following morning at $15.00 your order won't execute because you have placed a limit ($23.00) on how much you're going to get screwed out of. The lowest price(limit) you are willing to sell your shares for is $23.00. This will protect you from false gaps. Sometimes a stock will open low and then run right back up. Also can happen after a trading halt(open low, run back up).

 

Stop Limit is a good method to get IN to a position -- with minimal slippage.

Stop Market to get you OUT.

 

When you use stop market orders you'll end up paying the spread much of the time. This sucks, but you'll have better peace of mind and it will more than pay for itself the few times that you are unable to get execution at your stop limit order. It is especially important if you don't plan on monitoring your positions ALL the time.

Best of luck.