On using stops to buy and sell.. was sent to me, so I'm posting here
"Trading Desk Chat - Adaptability
Adaptability
By: Mike Gallo, Account Executive
Whether as a result of today's market volatility or a refinement of an individual's
trading strategies, utilizing stop orders to buy and sell stock has grown in
popularity. And while most brokerages do not provide the additional functionality
of 'combination orders', the ability to place a stop order as well as a stop-limit,
and even more unique a "combination stop order and limit order" on the same
position has offered tremendous value to clients at our firm, Yamner & Co., Inc. Investors that use there
To understand the true value of stop, stop-limit and combination "stop order and
limit orders", below I present some basic concepts and ideas related to the
proper use of these more out of the ordinary order types. What are these orders all
about?
Conceptually, stop orders may be used in a number of ways. The conventional method in
using stops is to exit a position to "stop" a loss. If a client were long
or owned stock, he/she might place a sell stop order to sell the stock if it falls
to a certain level. This will try to minimize the clients' losses, establishing a
point where the clients stock will be sold. An example might make sense. You own
1000 shares of ABCD. You mentally say that "if the stock falls to 5, that's it,
I want out". You w
Such a regimented method of handling stops offers more structure than the mental stops
that persons sometimes try to employ. Investors often will keep a mental track of
the stock in their head and, when they see it hit the $5 per share, will call their
broker and place the order to sell the position. Many though become overwhelmed
with emotions and fail to execute their game plan. This lack of discipline, on a
micro and macro level can ruin even the best investing strategy whether it is
long-term or sh
A second and less recognized method is to use stops on the buy-side. That is, to
enter a position by placing an order at a specified amount above the current market
price that, by design, will be filled only when the stock reaches up to that level.
The theory then is to see your order filled with the stock moving with a degree of
momentum that will, optimistically, continue to trend in your favor.
Let's examine a few examples of these optimistic buy-stops.
Your analysis of ABCD stock leads you to believe it will move up and further analysis
of data provides you a price range for the stock that should trigger a breakout.
Let's say, for example, ABCD is trading around 18.63 and your worksheet tells you if
it breaks 18.90 it's time to make the buy because a run up in price should follow.
You like the stock but it might move down, yet if it can 'break out' of a trading
range, it might rocket higher. You would place a stop order to buy the stock at,
let's say
There are risks with stop orders. The risk of stop orders exist when dealing with
stocks that are thinly traded or monster movers; because your stop becomes a market
order, you are subject to market movements and could end up buying the stock
significantly higher, depending on the bid and ask. Of course, if you would like
some protection against paying way up for the stock, and you can live with yourself
should you miss getting a position, there is always the stop limit order, which does
exactly what its
Example: "stop limit order sell 1000 ABCD at 5 stop, 4.75 limit" This order,
placed while ABCD is at 6, says to Sell ABCD if it hits 5, but don't sell it any
lower than 4.75. The stop price triggers action, the limit price establishes the
boundaries.
The "limit" component of the stop-limit order is a mixed bag. I have seen
occasions where a client placed an order to Sell 1000 ABCD at 10 stop, 10 limit.
The stock drops down quickly and breaches, without any prints the 10-dollar stop. It
prints left and right at 9.50 cents, 9.80 cents and 9.90 cents but never at the
clients limit at 10. Later it continues to collapse. The limit component of this
stop order kept the order from getting filled in the high nine range and left the
client without a fill at
Stop orders can also tremendously benefit short sellers. If your strategy is to sell
short a stock once it breaks a support level you can place a short sale stop order.
ZXYX is trading at 51 and you want to short it if it falls below 49.50. You can
place a sell stop at 49.45 and once the inside bid is 49.45 the order becomes a sell
short at market order. Execution can occur after an up bid for OTC stocks and an up
print for listed stocks. However, the stock could fall precipitously without a fill
even
Selling short with a stop limit provides a range for possible execution within your
set parameters. In this example ABCD is trading at 33.50 and it has a support level
of 31.25 that you believe it may fall through. You decide to place a sell short
order with a stop of 31.15 and a limit of 30. Once your stop is hit and while the
stock falls you will be able to receive executions at your limit or above. Keep in
mind the stock may have fallen off a cliff and tumble right through your limit
without a fill
We have examined getting into positions. Now let's take a look at exiting them in a
protective strategy.
You just shorted 500 shares of LMNO at 40 and you want to set a stop boundary to
restrict the potential loss and set a limit to achieve a profit. Based on your
computations and risk tolerance level you are willing to part with a loss in the
range of $1,000.00. So you enter a buy stop order to cover 500 LMNO at 41.50. This
order will be activated once the inside bid reaches 41.50 and become a market order
to buy back the stock. It provides a .50 margin to keep you within your loss
tolerance of $1,000.0
On a more positive note your estimations tell you the stock is going to go over the
falls without a barrel, you don't want to be greedy, and a $1,500.00 profit suits
your trade expectations. You place a buy to cover limit order of 500 LMNO at 37 and
once executed you cancel the stop order for a nice days work.
Both of these orders to cover are best placed good till cancelled, GTC, so you do not
have to watch it every day. You may want to tinker with the orders as the price
moves locking in some profit or limiting the loss as the stock moves in your favor
but if you have done your homework, are confident in your figures and just don't
have the time to watch the trade meticulously your guidelines are set and you can
move on to the next trade.
"Combination stop order and limit orders" - There are very few firms in the
entire world that offer this service. Our firm does. Sometimes, this is the key
functionality that gets us business. It is important to distinguish these orders
from the 'stop' or 'stop limit' orders discussed above. A 'stop limit' as noted
above is a single stop order with a limit placed on the order that is put into
action when the stop is triggered. A 'combination stop order and limit order' is
an entirely different beast.
It is actually a pair of 'related' orders: a 'stop order' and a 'limit order' as well.
Let's give a scenario. You are a methodical investor, a strategist. You buy 1000
ABCD. You say to yourself that if ABCD breaks below 5, it will crater, thus you
would want a stop order to protect that position. On the other hand, if the stock
moves up to 10, it should be sold for a profit. You obviously do not want to have
both executed so the "stop order and limit order combo" requires the
brokerage to cancel the s
This is a unique order type. In fact, outside of our firm, I know of no other firm
that offers such an order type. We offer it at Yamner & Co., Inc., as we are able to handle such complex order types with both our technologies and our personal attention to trading. For many investors, it makes all the difference.
There is a key word that, for some, should be glued to the top of their computer
monitor in caps: DISCIPLINE. to keep from abandoning strategy in total or in part.
Leaving the loss covering side of a combination order out of the mix is more than a
momentary lapse of reason in this trader's opinion. Market volatility alone can
wreck the best laid plans and it is better to take a modest loss and begin a new
trade than endure the frustrations of entering profitability only to let it slip
through your hands" |
