The Various Stock Order Types

Trailing Stops 

If JNJ continues to go up in price, the investor can remove the existing stop loss and place one higher up in price to protect the additional profit. Or the investor can set a trailing stop where the stops will automatically be moved up. The “trailing stop loss amount” that an investor specifies for this order can be in terms of dollar amount, or in a percentage amount.

Suppose an investor owns JNJ and the current price is at $154. The investor sets a trailing stop loss of $2. The stop loss will automatically be adjusted to be $2 lower than the highest price of JNJ from this point forward. This means that the sell will trigger if JNJ drops to $152 or lower.

If the price of JNJ goes up to $155, then the stop loss will move up to $153. If the price then drops back down to $154, the stop loss will continue to stay at $153. In other words, a trailing sell stop loss only moves the stop up. The stop does not go down.

Buy Stop Loss 

A buy stop loss order is often used when an investor has shorted a stock and then sets a buy stop loss at a price greater than the current price. If the stock rallies up to that price, the investor needs to buy in order to stop losing more money if the price were to continue up.

When the price reaches the stop loss price, it becomes a market order at that price. Therefore it is possible that the buy or sell will get filled at a higher or lower price than the stop loss price.

The Stop Limit Order 

The stop limit order works just like the stop loss order, except that when the price reaches the stop limit price, it becomes a limit order. This order lets the investor enter two prices: the stop price at which the order will be triggered, and the limit price.

Suppose an investor owns GLD with the price currently at $172, and they want to sell if the price drops to $170. The investor can set a sell stop limit order with a stop price of $170, and a limit price of $170.25. If GLD drops to $170, it triggers and becomes a limit order with a limit price of $170.25. It will not sell until the price comes back up to $170.25, or higher.

The limit order instructs the broker to sell only if the investor can get a good price of $170.25 or better. But if the price drops through $170 and it will not come back up to $170.25, the order will not get filled. Like any other limit order, the order may get filled completely, partially, or not at all. The risk with a stop limit order is that sometimes it does not get filled and thus does not protect the investor from loss.

Let’s say another GLD investor sets a sell stop limit order with a stop price of $170 and a limit price of $169.75. In this case, this order is more likely to get filled, because there is better chance that GLD will be above $169.75 at the time the stop is triggered. However, it is still not guaranteed to be filled.

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Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are ...

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