Types of Stop Orders

Hello everyone, thanks for stopping by and reading my blog. Its been a rough day and I hope none of you lost too much money. If so keep your head up and remember it cant go up everyday.

Today I would like to continue my series on placing stops by going through the different types of stop orders that can be placed. This may seem very basic for some of you but its something I see lots of confusion on, even for experienced traders.

Stop Limit Order:

A stop-limit order is an order to buy or sell a stock that combines the features of a limit order and a stop order. Once the stop price is reached, the stop-limit order becomes a limit order to buy or to sell at a specified price.

Just about the only benefit to a stop-limit is an investor can control the price that the trade gets executed at. The major problem with this type of order is once the stop is hit it turns into a limit. If we do not place the order correctly we may never get executed. Lets use an example: I have 50 shares of Apple and put in a stop limit order. I place the stop at $127 and then I place the limit at $127 as well. When AAPL falls it hits my stop and my limit order is placed, but if it continues to fall we will never get an execution because this order now being a limit we needed to see the stock stay at $127 or better. This is a common occurrence and it shows many people don't truly understand this type of stop order. To be used properly we needed to put the limit price some were under $127, say $126 and we would have been fine. As we go through the different orders you will come to see that the stop-limit order should never be used.

Stop Orders:

This is your plain old stop order. A stop order is an order to buy or to sell once the stock reaches a certain price. When this price is reached the stop order becomes a market order.
This is very similar to a stop-limit order however instead of becoming a limit order when the stop price is reached it becomes a market order. At first thought this sounds like a disadvantage, however the whole point of placing a stop is so we can get out of a falling stock quickly. I would rather loose a few more cents than never get a fill and loose even more money.
For those of us who watch the stock market very closely this is the type of order most prefer. The reason being is that we can place this at a specific price depending on the situation and we our always in control of the risk we are taking.

Trailing Stops:

You can think of a trailing-stop as the fire and forget stop order for those who don't watch every tick. We can think of a trailing-stop as a Ratchet we can move it one way but if we try to go back it will stop and won't let us. So as you can see this type of order will follow a stock up but if it reverses the stop will stay in place. The stop can be set to trail the stock by a percentage or dollar amount.
This is by far the most popular stop and one I suggest that everyone uses. By using the trailing-stop properly we insure that we never go from a winning position to loosing money.

Personally I would never use a stop-limit order, there is no benefit to its use and only sets you up to never get your shares sold. The normal stop order is to me the best stop a person can place and is the one I always use when opening an initial position. For the trailing-stop I place this order once my stock has moved up from the purchase price and I am concerned with locking in my gains if the stock should reverse on me.

I hope this has helped some of you understand the different types of stop orders that are available. Tomorrow we will go over a few ways you can employ stops successfully. Happy trading tomorrow and lets hope the market does a little better.