Sell stop orders keep you in a profitable position as long as possible.
While it is always interesting to speculate what it would be like to sell the absolute top (or buy the absolute bottom), it’s more practical to consider maximizing the profits without giving up to much of the possible gains.
Let a sell stop order do the work for you
Here’s a practical way to use this order to exit a stock.
Using Qualcomm as an example, wouldn’t it be nice to sell the stock somewhere near the all time high of $200?
If you had a profitable position in this stock prior to the all time high, you could place sell stop orders below significant lows as the price moves up.
One way to identify significant lows is to look for a low that is preceded and followed by at least two higher lows.
Each of the five significant lows shown below has at least two higher lows before and after.
Zooming in on the first significant low shows the the preceding and following higher lows.
One item to note about this method of sell stop placement is that an adjustment is not made until at least two days after a potential low is identified.
You can’t identify a significant low until two days have passed, in this case, the sell stop order is placed on the 22nd of the month (the last bar on this chart).
Here’s what a sell stop order might look like with your broker.
Notice that the stop price ($81.99) is less than the low marked with the red arrow (at $82.00).
Also, the order is a Good Till Cancel order, meaning that it remains active until either (1) the order is filled (if the stock trades at or below $81.99), (2) you cancel the order, or (3) the broker cancels the order (some brokers will cancel an order if a certain amount of time has passed and the order is not filled).
Here’s where your expertise comes in
The significant lows I marked off stop prior to the all time high. The next significant low doesn’t occur until after the all time high, approximately 20% lower than the high. How can we exit a profitable position as close to the top as possible.
Well, once you see a stock go into “runaway” mode – the stock is moving quickly in one direction, the daily range is significantly higher then normal – consider trailing the position below the one day low.
You have to use your judgment.
In other words, at the end of each day, move the sell stop below the current day’s low. Something like this:
On the close of trading for January 3rd, 2000, your sell stop order would be moved to below the day’s low of $174. The next day the stock opens at $172.563 and your order would become a market order (remember we did not set a limit to the stop order).
Typically, your order would be filled somewhere near the opening price. I recall that this stock was in “fast trading” conditions, so your fill price would likely not be at the opening price.
Sell stop orders are one way of keeping yourself in a profitable trade as long as possible without giving up a significant part of the profits.
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