4 Times Stop Orders Can be to Your Advantage
Yesterday we started talking about stock order types. I started you off with the basics.
We talked about some things you should consider before choosing a stock order type.
Let’s start today with looking at limit orders:
Buy or Sell With Limit Orders
A limit order adds a few more restrictions to the basic buy or sell market order to lock in specific prices.
Basically, the limit order will only be bought or sold if the price reaches your desired level. It has to reach the limit price or lower for buying, and the limit price or higher for selling.
So, if you’ve been scanning the prices and determined what your desired entry is, you can set the limit order and only execute the trade if it reaches that point. If it doesn’t, the trade won’t be executed.
When to Use Limit Orders
Here are some of the opportune moments to use limit orders:
1. When You Have a Specific Entry/Exit in Mind
Since the limit order allows you to only buy if the price reaches or exceeds what you specify, that makes sense when you want to have a firm entry and exit.
2. You Want to Buy Below Market Price
If the current market price is higher than you want but you think it will go lower, a limit order might allow you to get the price you want.
3. You Want to Sell Above Market Price
If the current market price is lower than the amount you want to make, you can set a limit order for the sale in hopes of getting a higher price.
Of course, in the last two scenarios, you have to be very careful to set reasonable numbers, because if they aren’t reached you might lose out on the trade entirely and lose your window.
Stop Sell and Stop Buy Orders
A stop order, also known as a stop-loss order, is an order type where you will buy or sell a stock when it reaches a specified price. That’s called the stop price.
Once the stop price has been reached, the stop order is executed as a market order.
A buy stop order is when the trade is entered at a stop price which exceeds the current market price. A sell stop order is when the trade is entered at a stop price which is lower than the current market price.
Trailing Stop Order
It’s similar to a stop-loss order in that it’s designed to protect you from losses. But it works a little differently. A trailing stop order allows you to set your order a specific percentage away from the stock’s market price.
It offers more flexibility than the stop-loss order, which is fixed and would need to be manually reset.
One of the biggest benefits of a trailing stop is that it lets you specify how much you’re willing to lose, but it doesn’t put a cap on how much profit you can take.
When to Use Stop Orders
When should you use a stop order? Here are some situations where it can be advantageous:
1. If You Can’t Be Near Your Computer
If you find yourself in a situation where you might not be right on top of the trade, a stop order is a great way to protect your assets.
2. If Things Are Volatile
If you’re trading a particularly volatile stock or something like a cryptocurrency where the price could change very quickly, a stop order can help you limit losses and maximize profits.
3. If You Want to Protect Profits on a Short Sale
A lot of investors use buy stop orders to maximize profits on a short sale.
4. If You Want to Limit Losses
Particularly when selling, investors want to limit their losses. A sell stop order can help do that.
Don’t bail out yet.
There are still some additional order types you should know about for trading stocks.
They’re less popular but, still good to have under your belt.
I’ll cover them in the next issue. Stay tuned.
Editor, Penny Stock Millionaires