How Stop Orders Lower Online Trading Risk

Stop Orders

What Is A Stop Order?

A "stop" is an order to buy at a price above or sell at a price below the current market price. Stops, or stop orders, are used to protect your capital and lock in profits.

Let's say for example that you have just bought 100 shares of ABC at $40.00. You have already decided that you only want to risk $2.00 per share, so you immediately place a stop order at $38.00. If the price of ABC drops to $38.00, your broker will sell your shares at the market price near $38.00.

However, if the price doesn't drop, but goes up instead to $44.00, you may want to "trail your stop" by canceling the $38.00 stop and place another one higher, at say, $42.00. Now you have locked in at least $2.00 per share profit ($40.00 purchase price less $42.00 stop.)

If the price now drops from $44.00 to $42.00, your shares will be sold at the market near $42.00, leaving you with a $2.00 per share gain of $200.00. If the price instead continues to move higher, say up to $46.00, you can "trail" the stop upward by canceling the most recent stop placed at $42.00, and enter a new stop order at $44.00. This "tightening of the stop" locks in another $2.00 per share for a total profit of $400.00.

The RightLine Report provides Stop Loss levels for all the stocks prsented in each issue. We recognize that traders use varying timeframes and have different tolerances for risk. This results in numerous possible stop loss scenarios. We also realize a need for guidance in this important area. Stops can be confusing!

To help determine appropriate levels, RightLine analysts use a "best fit" scenario for reasonable stop placement. We anticipate what the "average" trader should do. As such, we combine chart features like support & resistance levels, trendlines, average true range, and other influences such as earnings and volatility.

Our write-ups also feature "trailing" stop recommendations. That is, the "initial" stop placement - made immediately upon entering a position - becomes a "trailing" stop as prices move favorably. This "trailing" stop is designed to lock in profits as they accumulate. The Report also gives you the profit price point at which to tighten the trailing stop, and how much to tighten it.