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Success Trading: Yet More Basic Terminology for New Traders Publish Date : 1/10/2006 6:32:01 AM Source : Chuck Cox
Stop Loss – Also called a “stop”, this is the price at which your position will be automatically closed. If you buy IBM at $50 per share, and then enter $45 as your stop level, then your position will be sold when the price hits $45. So this enables you to protect your account from a large loss. Bear in mind, however, that this stop level only “triggers” the closing of the position and doesn’t guarantee you’ll get out at that price. A quick price drop might mean your order was executed at $42 instead of $45 because of market volatility – but this would be an extreme case. Also, if you carry the position overnight and IBM opened at $40, then that’s the price it would be sold. Keep in mind that if you had “shorted” IBM at $50, then your stop would be placed above $50 to protect your account. When the stop is triggered on a short position, you would be buying to cover the position. Buy Stop – The description above pertains to a “sell stop”, but there are also “buy stops” that can be very useful. These are used to enter a position at a certain point. Suppose you’re using a trading system requires that you buy when a stock breaks above a certain price level. Let’s say that you are waiting for IBM to break out of a channel and to do so, it would need to reach $51. In this case, you simply place a buy stop at $51 for the number of shares you desire and your online broker’s system will buy that for you automatically whenever IBM hits $51. The only thing you would have to do and check back occasionally to see if the order has been filled. These two tools, the sell stop and buy stop are invaluable to traders – especially those who are just starting out. Make this a habit from day one in your trading – ALWAYS place a stop loss immediately after getting an order filled. Obey this rule and the market will never hurt you very badly – you’ll take a hard sting every now and then, but you’ll stay alive to come back another day! 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, www.earncashathometoday.com/trading-stocks.htm |
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