WWII 045: Using Stop Orders to Protect Your Principal, Changing Orders, More Trump Tweets, Inflation at 1.9%, Mortgage Activity Picks Up
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This episode is about stop loss orders, the different types, and how to think about using them.
Main Topic: Using Stop Loss Orders to Limit Your Downside
Stop loss orders are used to preserve capital during times of falling prices. Most value investors don’t use stop losses, and in fact, stop losses can become a problem when they cluster around trading concepts like support and resistance. By moving market prices a little bit, market makers can trigger stops and capture the trading commission.
Let’s define the different types of stops and then we’ll figure out how to use them, if at all.
Here is an example:
Bob buys 2,000 shares of GE stock. His cost was $30 per share. He wants to protect his principal in the case of a large market drop, so he places a sell-stop order at $28.5 to ensure the most he will lose is 5% ($30 - $28.5 = $1.5 and $1.5 / $30 = .05).
If GE drops below $28.5, then the order will become a market order and get filled at the current market price which will probably be less than $28.5. This type of order may work better in very liquid stocks (lots of stock outstanding and heavily traded – lots of volume everyday). If the stock is illiquid (low number of shares outstanding and low volume), the market could easily gap down well below the $28.5 and the market price may be far lower when the stop is executed.
Stop Limit Orders put a limit on the price a stop will execute at.
So let’s say Bob put a Stop Limit Order on his GE position. He would choose two different prices. The first price is the Sell Price. When the market price hits the Sell Price, the Stop Limit Order becomes a limit order to sell.
The second price Bob chooses is the Limit Price. The sell limit order will only execute at the limit price or better.
So let’s say Bob chooses a Sell Price of $28.50 and a Limit Price of $27.00. If the market hits the $28.50, the limit sell order would have to be executed at $27.00 or better. If the market gaps down from above $28.50 to below $27.00, the order will continue to be open and Bob will continue to hold his position. If the market price rises above $27, the sell order will be executed.
You can see from these illustrations that there are nuances to using stop orders of any kind. Like all investing tools, these types of orders must be studied and used strategically if at all.
Rule 1: Your Stop Loss must be less than you take in profit."
Ask JB: Do You Get Charged Commission For Changing Orders?
JB Says: You won’t be charged a commission unless an order is executed. You can check your “Order Status” tab to see if it has been executed. If not, you can cancel it and change the price.
submitted 1 day ago by ehs4290
JB Says: Yeah, but maybe he’ll bash something worth owning.
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