Stop question

[Beats_d 0]

Hey, When I set a stop limit or market can someone tell me what the difference is between the price i enter and the trigger price? do thet have to be the same ? Can they be different and if so what does that mean? 

[Bailey Nevener 83]

TPrice, or Trigger Price, is the price that will activate a stop order when hit.

Price is the farthest price from that trigger price that your order will be executed.

 

Here's an example.

Position:

500 shares LONG 

Average Cost $10.25

Symbol XYZ

 

Limit stop order to be placed: 

SELL 500 shares

Trigger Price $10.10

Price $10.00.

Symbol XYZ

 

 

If the bid of XYZ comes down to 10.10 (the trigger price), the 500 shares will begin to be sold.

If the spread is very wide on XYZ, and the bid drops past 10.00 before all of your 500 shares can be sold, the order will stop executing.

 

Therefore you may find yourself in a situation where the price is below 10.00 (the "price"), and you are still holding a portion of the 500 shares, say 125.

 

Why would a trader place an order that only sells their shares in a specified range?

In the off chance that there is a random spike down in the price of a stock in the blink of an eye, you wouldn't want to be the one selling at the lowest price.

You will often see stock charts with ridiculous spikes in the price action that correct themselves within a split second.

 

Imagine you placed a a market stop order (exits at any price below the trigger price)  on the 500 shares you have instead of the limit stop order. (there is no "price" component of a market stop order)

It is possible during one of these random spikes, your shares would be sold near the worst possible price. 

This could be several cents or dollars from where you were actually willing to sell, right before the price corrects right back to where it was just trading.

 

By using a limit stop order, you are preventing one of those spikes from costing you significantly more than you were actually willing to risk.

There still however is the chance that the bid and ask are so far apart that the price gaps past your limit stop order, in which case you will still experience the same problem.

 

My advice is, trade highly liquid stocks and have your limit stop order's distance between the trigger price and the price be wide enough to where the stock couldn't possible gap over it all of a sudden.

For most stocks this will be 10 cents or higher.

Many traders still use market stop orders because they are always trading very liquid stocks with no issues.

 

I personally use limit stop orders, but I use them for a different reason than the risk management aspect.

 

Good luck trading,

Bailey Nevener

Edited May 31, 2021 by Bailey Nevener