By Alton Hill
Definition of a Stop Limit Order
A stop limit order sends an instruction to execute a stop order within a given price range.
Once the stop is triggered, your broker will then attempt to fill your order up to by not exceeding the limit price.
Stop Limit Order for Entries
Trader 1 - sets a sell short stop limit with a $40 Stop and 39.90 limit.
This means that once $40 is hit, an order is sent to attempt to sell the stock short between $40 and 39.90.
Trader 1 was able to sell short the stock at $39.93.
Trader 2 - sets a sell short stop market order at $40.
This means that once $40 is hit, an order is sent to sell short the stock at market.
Unfortunately the bid/ask spread opens up by 15 cents once the stock crosses $40 and Trader's 2 order is executed at market with a fill price of $39.72.
The stock then quickly bounces back up to $39.95 and Trader 2 is instantly sitting in a losing position.
Now, I know this is not always the norm, but I'm trying to make a point.
Clearly Trader 1 has far more control over the price he/she is attempting to fill on their trade.
Trader 2 is leaving their fill price up to the best market price and in really volatile market, this could prove to be a painful experience.
Stop Limit Order for Exits
While stop limits can be used for exiting trades, it is not recommended, because if your limit price is not hit, you may not be able to get out of your position.
If you insist on using stop limit trades for exiting positions, you should make the spread between the stop and limit price large enough that it will increase the odds of your order being filled.
Do not have a sell stop limit order for a stock with a stop of $200 and limit $200.01.
This stop limit order can and most likely will be jumped and if you are in a losing trade, your loss could potentially run away from you.
See You at the Top,
Alton Hill
Alton Hill is the co-founder of http://www.mysmp.com/ (My Stock Market Power) which provides free trading articles to investors. Please visit http://www.mysmp.com/trading-articles.html for more free articles.
Article Source: http://EzineArticles.com/?expert=Alton_Hill
Showing posts with label Exit Strategy. Show all posts
Showing posts with label Exit Strategy. Show all posts
Sunday, October 11, 2009
Friday, October 9, 2009
Successful Trading – Taking Profits - Part 2
Author: Chuck Cox
Suppose your position has made a big move and you moved your stop to your purchase price as recommended.
Then let’s say your stock continues to make a big move and now we’re asking again the questions we asked back in the first paragraph.
The first profit taking technique you can use is a trailing stop.
If you moved your stop to your purchase price, then you’ve already used a trailing stop.
Now you can continue to move your stop up as the price rises until the market “stops” you out of the position.
So in essence, what you’re doing is letting the market decide when to take profits.
Bear in mind that you don’t have to use the same price gap that was used when you first set your stop.
That initial move was done to protect your account – once you’ve taken the threat of a losing trade away from your account, you can do most anything with your stop after that.
One approach that some traders use is to place their stop at the half way point between their purchase price and the present price.
This approach is giving half of your profits back to the markets, but it’ll keep you in the market longer giving the stock plenty of room to move.
A variation of this approach is to move up your stop to the 75% profit level after a period of time has elapsed.
Another profit taking technique for traders is to use a reward/risk ratio.
This is a sound approach that is used more often in short term trading.
The way it works is that you determine what amount you are going to risk on a given trade and then set a profit objective expressed a multiple of that risk amount.
For instance, suppose you’ve bought 100 shares of IBM at $50 per share and you’ve determined that your stop will be placed at $47.50.
This position has a total risk level of $250 to your account.
If you’ve set your reward/risk ratio at 4:1, then this means that when the price reaches $60 and your profit is $1000 (4 x $250), you will take profits.
Note that using this approach with a 4:1 ratio would only require you to hit one trade in five to break even – a 20% winning percentage.
One last profit taking approach you may want to consider is taking partial profits on that first strong move.
In other words, when you get that first move in your favor and you move your stop up to your purchase price, you may want to sell half of your position and take some profits early.
You then let the remaining position run using trailing stops until the market stops you out.
This approach is used by many swing traders and will result in more winners, but the profits will be smaller.
But remember , smaller profits mean that you need more winners.
Source: Free Articles from ArticlesFactory.com
ABOUT THE AUTHOR
Chuck Cox is a Technical Writer and Industrial Scientist by professional with a background in statistics. He has used mathematical and statistical methods to invest and trade in the stock, futures, and options markets. Chuck has owned various businesses and presently operates several websites. To learn more about trading the markets, visit his website, http://www.earncashathometoday.com/trading-stocks.htm
Suppose your position has made a big move and you moved your stop to your purchase price as recommended.
Then let’s say your stock continues to make a big move and now we’re asking again the questions we asked back in the first paragraph.
The first profit taking technique you can use is a trailing stop.
If you moved your stop to your purchase price, then you’ve already used a trailing stop.
Now you can continue to move your stop up as the price rises until the market “stops” you out of the position.
So in essence, what you’re doing is letting the market decide when to take profits.
Bear in mind that you don’t have to use the same price gap that was used when you first set your stop.
That initial move was done to protect your account – once you’ve taken the threat of a losing trade away from your account, you can do most anything with your stop after that.
One approach that some traders use is to place their stop at the half way point between their purchase price and the present price.
This approach is giving half of your profits back to the markets, but it’ll keep you in the market longer giving the stock plenty of room to move.
A variation of this approach is to move up your stop to the 75% profit level after a period of time has elapsed.
Another profit taking technique for traders is to use a reward/risk ratio.
This is a sound approach that is used more often in short term trading.
The way it works is that you determine what amount you are going to risk on a given trade and then set a profit objective expressed a multiple of that risk amount.
For instance, suppose you’ve bought 100 shares of IBM at $50 per share and you’ve determined that your stop will be placed at $47.50.
This position has a total risk level of $250 to your account.
If you’ve set your reward/risk ratio at 4:1, then this means that when the price reaches $60 and your profit is $1000 (4 x $250), you will take profits.
Note that using this approach with a 4:1 ratio would only require you to hit one trade in five to break even – a 20% winning percentage.
One last profit taking approach you may want to consider is taking partial profits on that first strong move.
In other words, when you get that first move in your favor and you move your stop up to your purchase price, you may want to sell half of your position and take some profits early.
You then let the remaining position run using trailing stops until the market stops you out.
This approach is used by many swing traders and will result in more winners, but the profits will be smaller.
But remember , smaller profits mean that you need more winners.
Source: Free Articles from ArticlesFactory.com
ABOUT THE AUTHOR
Chuck Cox is a Technical Writer and Industrial Scientist by professional with a background in statistics. He has used mathematical and statistical methods to invest and trade in the stock, futures, and options markets. Chuck has owned various businesses and presently operates several websites. To learn more about trading the markets, visit his website, http://www.earncashathometoday.com/trading-stocks.htm
Thursday, October 8, 2009
Successful Trading – Taking Profits - Part 1
Author: Chuck Cox
So you’re started trading, you bought some positions with your online broker, you’ve set some reasonable stop-losses to protect your account and all of a sudden one of your positions move strongly in your favor – so what do you do now?
This my friend, is probably the hardest situation to deal with in trading the market – believe it or not.
Do you take profits? Do you hold on for more profits? Do you take partial profits?
There is no textbook answer to these questions as it depends on your trading objective.
That’s why you need to determine your objective BEFORE you start trading.
No matter what you do, there will be regrets if you trade long enough.
If you decide to take profits, there will be times when the market makes a huge move without you, if you decide to hold on for more profits, there will be times when you’ll lose the profits you had.
However, the important thing is that you decide on your objective and stick to it no matter what happens.
With that said, let’s discuss some profit taking options that you might consider.
When you’ve bought your stock, option or commodity and then placed your stop, you must first try to prevent that position from losing money.
We recommend that you move your stop right along with the price movement.
In other words, if your stop is placed one point below your purchase price and your stock moves up one point, then we recommend you move your stop up to your purchase price.
After doing this, you now have a scratch trade at the very least and the position poses virtually no risk to your account – only “gap downs” at market opens can hurt you.
And of course, the golden rule with using stops is that they can only be moved up and must NEVER be moved down.
Source: Free Articles from ArticlesFactory.com
ABOUT THE AUTHOR
Chuck Cox is a Technical Writer and Industrial Scientist by professional with a background in statistics. He has used mathematical and statistical methods to invest and trade in the stock, futures, and options markets. Chuck has owned various businesses and presently operates several websites. To learn more about trading the markets, visit his website, http://www.earncashathometoday.com/trading-stocks.htm
So you’re started trading, you bought some positions with your online broker, you’ve set some reasonable stop-losses to protect your account and all of a sudden one of your positions move strongly in your favor – so what do you do now?
This my friend, is probably the hardest situation to deal with in trading the market – believe it or not.
Do you take profits? Do you hold on for more profits? Do you take partial profits?
There is no textbook answer to these questions as it depends on your trading objective.
That’s why you need to determine your objective BEFORE you start trading.
No matter what you do, there will be regrets if you trade long enough.
If you decide to take profits, there will be times when the market makes a huge move without you, if you decide to hold on for more profits, there will be times when you’ll lose the profits you had.
However, the important thing is that you decide on your objective and stick to it no matter what happens.
With that said, let’s discuss some profit taking options that you might consider.
When you’ve bought your stock, option or commodity and then placed your stop, you must first try to prevent that position from losing money.
We recommend that you move your stop right along with the price movement.
In other words, if your stop is placed one point below your purchase price and your stock moves up one point, then we recommend you move your stop up to your purchase price.
After doing this, you now have a scratch trade at the very least and the position poses virtually no risk to your account – only “gap downs” at market opens can hurt you.
And of course, the golden rule with using stops is that they can only be moved up and must NEVER be moved down.
Source: Free Articles from ArticlesFactory.com
ABOUT THE AUTHOR
Chuck Cox is a Technical Writer and Industrial Scientist by professional with a background in statistics. He has used mathematical and statistical methods to invest and trade in the stock, futures, and options markets. Chuck has owned various businesses and presently operates several websites. To learn more about trading the markets, visit his website, http://www.earncashathometoday.com/trading-stocks.htm
Wednesday, October 7, 2009
Pros and Cons of Mental Stop and Hard Physical Stops
Author: Larry Swing
When a trader start his new venture into trading or investing, he finds out many things that need to be learned, understood and used as part of his tools to become successful.
One of the useful tools in many trading software is the use of stop loss orders.
Although this a standard tool, not many use them. Some use them in different ways to try to achieve one goal: profitability.
However, some use mental stop, a method in which a trader determines a stop loss (either in dollar amount, percentage or point system) in his mind but not physically place it in the trading platform.
Whereas the physical stop order is placed in the platform on the brokers server or directly on the exchange.
What is the difference between the two and what are the advantages and disadvantages of using either?
Advantages and disadvantages of using physical stops:
1. Placing physical stops remove the stress that normally accompanies the trade.
Once its placed, there is usually a sense of relief that the risk is known and cannot be changed.
This advantage is due to the removal from having to think and guess what to do next during the trade.
2. Mental stops give the trader greater flexibility that may fit his trading style where adjustments can be made according to changing market conditions.
This requires thorough understanding of price action to be able to use this flexibility.
3. Mental stops are difficult to implement for those who lack discipline and concentration.
Discipline is the biggest obstacle for a trader to execute his planned mental stops during the trade.
Many cannot cope with the fast action of the market, handling a losing situation, or cannot even stay focused with the trading plan before the trade.
This cause the wish-washy decision-making that inhibit the trader from sticking to his original mental stop.
Many times, the final stop loss ends up very far off the original stop planned, thus a larger loss than planned or expected.
4. Physical stops can be a disadvantage in markets that are prone to stop-hunting, a method used by floor traders, market makers, or highly capitalized traders to move market to prices where high concentration of stop loss orders are placed.
Be they in stocks, futures or commodities and forex markets, all markets are vulnerable to them, especially where liquidity is low. This is especially true in stocks during lunch hour where volume is thin or stocks that have low daily average volume.
5. Physical stops protect traders from unexpected disasters and mishaps they routinely suffer.
When the stop loss order is placed, it is parked at the brokers server or at the exchange, depending on the instrument and the exchange in which the trade is made. Having this order placed away from the traders computer, this will protect from outages, internet connectivity problems, trading software problems, or even the trader must attend to other priorities away from the trading desk.
6. Using mental stops can keep the traders focus in the trade and not be distracted with anything else.
Physical stops are in place will cause the trader to be less attentive to the trade and market at hand, causing him to tend to other things besides trading.
Concentration and focus may suffer. If the trader must stay focused for the subsequent trades, concentration is a must; else he may miss important information that goes between trades.
It is always recommended that the novice traders use physical stops entirely and unconditionally until he can control his emotions and discipline.
In additional, he needs better understand the market before he can make rapid and objective decisions in real time in order to be flexible in using mental stops.
The trader may not like the idea of being stopped out just before the market goes his way, leaving him out of the market.
Each type of stops has advantages and disadvantages, but stops must be seen as insurance to keep his capital from major harm.
It’s a difficult decision to make and only through trial and error and assessing personal qualities or weakness will the trader can determine which is best for him.
Article Source :
http://www.bestmanagementarticles.com/
http://stock-trading-investment.bestmanagementarticles.com/
About the Author :
Larry Swing CEO & Head Swing Trader
swing trading with mrswing.com
theboss@mrswing.com
+1 (281) 968-2718
Yahoo & Skype ID: larry_swing
When a trader start his new venture into trading or investing, he finds out many things that need to be learned, understood and used as part of his tools to become successful.
One of the useful tools in many trading software is the use of stop loss orders.
Although this a standard tool, not many use them. Some use them in different ways to try to achieve one goal: profitability.
However, some use mental stop, a method in which a trader determines a stop loss (either in dollar amount, percentage or point system) in his mind but not physically place it in the trading platform.
Whereas the physical stop order is placed in the platform on the brokers server or directly on the exchange.
What is the difference between the two and what are the advantages and disadvantages of using either?
Advantages and disadvantages of using physical stops:
1. Placing physical stops remove the stress that normally accompanies the trade.
Once its placed, there is usually a sense of relief that the risk is known and cannot be changed.
This advantage is due to the removal from having to think and guess what to do next during the trade.
2. Mental stops give the trader greater flexibility that may fit his trading style where adjustments can be made according to changing market conditions.
This requires thorough understanding of price action to be able to use this flexibility.
3. Mental stops are difficult to implement for those who lack discipline and concentration.
Discipline is the biggest obstacle for a trader to execute his planned mental stops during the trade.
Many cannot cope with the fast action of the market, handling a losing situation, or cannot even stay focused with the trading plan before the trade.
This cause the wish-washy decision-making that inhibit the trader from sticking to his original mental stop.
Many times, the final stop loss ends up very far off the original stop planned, thus a larger loss than planned or expected.
4. Physical stops can be a disadvantage in markets that are prone to stop-hunting, a method used by floor traders, market makers, or highly capitalized traders to move market to prices where high concentration of stop loss orders are placed.
Be they in stocks, futures or commodities and forex markets, all markets are vulnerable to them, especially where liquidity is low. This is especially true in stocks during lunch hour where volume is thin or stocks that have low daily average volume.
5. Physical stops protect traders from unexpected disasters and mishaps they routinely suffer.
When the stop loss order is placed, it is parked at the brokers server or at the exchange, depending on the instrument and the exchange in which the trade is made. Having this order placed away from the traders computer, this will protect from outages, internet connectivity problems, trading software problems, or even the trader must attend to other priorities away from the trading desk.
6. Using mental stops can keep the traders focus in the trade and not be distracted with anything else.
Physical stops are in place will cause the trader to be less attentive to the trade and market at hand, causing him to tend to other things besides trading.
Concentration and focus may suffer. If the trader must stay focused for the subsequent trades, concentration is a must; else he may miss important information that goes between trades.
It is always recommended that the novice traders use physical stops entirely and unconditionally until he can control his emotions and discipline.
In additional, he needs better understand the market before he can make rapid and objective decisions in real time in order to be flexible in using mental stops.
The trader may not like the idea of being stopped out just before the market goes his way, leaving him out of the market.
Each type of stops has advantages and disadvantages, but stops must be seen as insurance to keep his capital from major harm.
It’s a difficult decision to make and only through trial and error and assessing personal qualities or weakness will the trader can determine which is best for him.
Article Source :
http://www.bestmanagementarticles.com/
http://stock-trading-investment.bestmanagementarticles.com/
About the Author :
Larry Swing CEO & Head Swing Trader
swing trading with mrswing.com
theboss@mrswing.com
+1 (281) 968-2718
Yahoo & Skype ID: larry_swing
