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SO YOU WANT TO TRADE ONLINE
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| Stop Orders how to use them. |
| Explanations for using stop orders can be extensive, I suggest reviewing this page several times |
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| Once you purchase a stock you'll want to protect your profits by placing a sell stop order. How do you determine what price you should place your stop order at? To answer this you need examine your risk tolerance level. While the following list is not inclusive, it is in my opinion the more commonly and straight forward means of determining stop prices: 1.) Simple - for short term traders ,set stop price anywhere from 1/8 - 3/4 of a point below yesterday's low. If your risk tolerance is greater and the character of your stock generally moves in 3 or 5 points or so in a day or week, you may want to use that as a guide. (analyzing the character movement of your stock is a vital part of successful trading) 2.) Trendline stop- utilize a current up trending trendline you currently have drawn on your stock's chart. Extend the trendline forward to include the current trading day and determine the price your stock would be at if it dropped below this line (1/4- 3/4 point) and use that for your stop. (this is my most favorite stop to use, why? I use short term trendlines and for the most part once a stock penetrates these lines is can be a good indication of a change in trend. It takes practice but I find I'm most able to take advantage of runs and get out when momentum looks to be changing going in the other direction) 3.) Average daily intraday drop- go back 10 -14 trading days, now calculate the difference between yesterdays close and today's low.( for ex. yesterday's close 75, today the stock traded as low as 72. the difference then would be 3). Now after doing this simple calculation for each subsequent day of each of the 10-14 days you use. Then add up all these differences and divide by the number of days you used to come up with a daily average difference. You can then use this difference to calculate your stop. Ex. your avg. difference is 3.5, your stock closed yesterday at 80, then use 75 or 76 as your stop.(1/4-3/4 point below the difference average) now if you were to decide on a buy stop for a short position, you can use the same method however from yesterdays close take the difference of today's high for 10 -14 days and average out. 4.) Use previous resistance and support points- look at the most recent high, if your stock price is above it this may prove to be some support (stop price) if your stock price is below it it may prove to be resistance (double top ?). Key support / resistance points would also most likely fall at the key Moving Averages 13, 25, 50, 200. particularyly the 50 /200. (Note whenever your stock drops below it's 50 / 200 MA it is generally not a very good sign, and the stock will likely continue to trade down. It would require some substantially goods news about the company or sector to create some new buying interest before the stock could move back up and break thru this.) The biggest thing I find with traders is that some stop using stop orders to protect themselves because they keep getting stopped out. ( *stopped out is when you place a sell stop order and the stock does in fact trade down to the price you set thereby initiating a trade closing out your position). My answer to that is they were more than likely using to tight of sell stop to the current price, not leaving enough lee-way for a stocks intraday swing. (again know the trading character of your stock) Just as you place a lot of importance on selecting which stock to buy, this same decision needs also to be kept in mind as to how much of an allowable intraday swing would not rattle your nerves. You have to remember the same rules do not apply to each stock, each stock has it's own character in relation to volume/ hype / buying -selling. To determine a proper sell stop price you need to look at the volatility of the stock your looking to buy. Some stock particularly low priced stocks may only have an intraday swing of 1/4 - 1 point. While a stock that trades at 50, 80 or 100 may have an intraday swing on average of 3-5 points or more.( a good example of this would be the technology stocks.) So if the stock your buying has a failrly large intraday price swing and you use a stop of only a point or so, your surely going to get stopped out and possible miss out on some gains of the stock's run. Now once you have established your sell stop for your long position you'll want to change your stop order each day along with your stock's share price. ( remember your only adjusting upward to coincide with your stock's share rising - however if the stock starts to trade down you leave your sell stop alone do not adjust downward). Now some traders will adjust their sell stops throughout the trading day in an effort to maximize profits, but you can just as well simply enter a new sell stop each day. (remember you are placing day orders only which would require you to place a new order each day) Stop orders when used properly will help you maximize your gain potential while limiting your downside risk. The markets can take a turn for the worse at a moments notice or some negative news could come out regarding your stock driving down your share price. When bad news comes out about a stock and the stock sells off, it can take quite a lenght of time for sediment to change that would reinvigorate the stock price and have it move back up. I have seen to many traders not have sell stop orders in place, the bad news hits - they don't sell - and the stock continues to trade down. Now each day goes by they hope the stock recovers - it doesn't - it's down 5 points now, now 10.. -and they get further and further in a hole. Now because they do not want to take such a huge loss they continue to wait, and wait, further tying up their capital which could of been used for other opportunities. You can see that stop orders not only help save you from huge losses, but by using them they force you to move on and find another more profitable trade. Some times you have to bite the bullet and take that 1, 2 point loss which your sell stop may have initiated. However if your stock continues to move higher not only do you protect your original investment, but as your share price moves higher, your stops move higher, and now are able to protect your gains. So what if you get stopped out, you can always re-enter your position on the stock's next pullback. Now buy stops on the hand can serve two purposes, 1.) protect your short sell position 2. ) use to enter breakout's on a stock's run- ex. a break up through a down trend line, break up through a key MA., breakout above a double top, new high etc. just to name a few. (covered in more detail in Trading Strategy Breakout's coming soon) . Using a buy stop for a short position can be used in the same way as a sell stop in a long position but obviously your setting up your price stop targets in the opposite direction. You woulld look for some upward resistance levels of significance. (a few are: downtrending trendlines, Moving averages and moving average crossovers, previous highs and lows) There are many, many ways to use stop orders and many methods to determine the stop price besides the ones mentioned above. One of my other favorite method for using determining stops as well as entry and exist points is with relationship to Fibonacci retracements ratios 38.2% , 50% , and 61.8%. This will be covered in more detail in "Trading Strategies Fibonacci" coming soon. |
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