Using A Stop Order

by David Jenyns on October 30, 2009

If the stock should drop to this level, your stop automatically becomes a market order to sell, thus preserving seven of your 13 points. If, however, the stock should continue to advance, the stop order can be moved upward, point by point, behind it. At 115, the stop could be pegged at 109.

A stop order can also be entered at the time of purchase, to try to limit losses. If the stock advances, the stop is moved up a reasonable distance behind it. On the short side, the stop serves the same purpose. If you have sold Nickel short at 110 and it is now at 104, your six-point profit can be somewhat protected by a stop order to buy at 107.

If the stop order is placed too close to the market — and two points away is the usual peg — it is quite possible that the market will dip briefly, catch the stop, and then march briskly upward before the buyer can get aboard again. For the stop cannot guarantee that you will receive the indicated price.

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