Page 280 - THE MARKET WHISPERER

276 PART 9 - The Trading Platform

Stop order

The stop order is conditional upon the stock moving up or down to a
certain price before it executes. One example would be when I do not hold
a certain stock and want to move to buying it if it rises above a certain
price. Another case might be when I hold the stock and want to sell if it
drops beneath a certain price. The stop order does not stand alone: it is
always linked to another execution order.

For example: if the stock rises to price X, then buy, but at no more than Y
cents above price X. In other words, this is a stop + limit because I am only
willing to pay up to a certain price. I might also choose a buy stop + market
combination, such as buy above price X at any price.

Confused? We will clarify this further with additional examples.

• Stop loss order
The most common type of protective stop order is called a “stop loss”.

As with all stop orders, this one too indicates a change of status, i.e.“I hold
a stock and wish to sell when it breaks under a certain price.”

For example: I bought a stock at $30 and want to define in advance my
exit point at a loss if the stock drops below $29.70. In other words, if the
stock drops to $29.70, I want to sell it, lock in my loss, and “stop” it from
getting worse. To do this, I need to use a stop order. When entering the
order in the trading platform, I will first need to click STOP, and in the
window that opens, enter the stop price of $29.70. I now define what I
want to happen when the stock falls to the stop price. I need to choose
between selling at limit of X cents (which means, “I want to sell but for no
less than price Y”) or selling at market (which means, “If the price drops to
$29.70 I want to sell immediately and for any price”.)

The outcome: if the stock drops to $29.70 it will sell at my limit or at
market. The advantage of the stop limit order is that it ensures the sale will
not be executed beneath the defined price. The disadvantage of the stop
limit order is the fact that if there is a shortage of buyers, I might find that
the stock has gone further below the limit and dropped to a level which is
far lower than I had wished, and now I am still in the stock, waiting to sell
it higher than the current market. Hence, the advantage of the stop market
order is that I will know clearly that I exit the stock when it drops past the
stop price.