Stop orders are used to enter a stock as the stock is moving in the intended direction.
Protective stop orders are used to limit losses or take profits.
Buy stop orders are placed above the current price. Sell stop orders are placed below the current price.
The best way to explain how stop orders work is by example.
Agilent Technologies was a stock signaling a rally on April 12th, 2002. The stock had closed up relative to it’s open and closed greater than the previous day’s close.
Since the short term trend was down, the best way to enter this stock was to wait for it to trade above the April 12th high of $32.648.
Placed a buy stop order at $32.69 as the market opened on April 15th 2002 . order was filled at $32.70.
The next step is to place a protective sell stop order below the most recent low. Once the stock was bought, it’s time to protect from losses. This is especially important for people who can not watch the stock market all day. Knowing at what price you will exit is key to your long term success.
The previous day’s low was $31.883. The protective sell stop order is placed at $31.65.
Notice that this is a “Good Until Canceled” sell stop order. This means the order is in place until either (1) the stock drops to $31.65 or less and then the order becomes a market order to sell, or (2) 60 days have passed by and the stock is not sold, then the order is cancelled by the broker (this is specific to your broker – so check their policy).
What to do next .
As the stock advances, the best course of action is to make sell stop adjustments.
If A continues to advance, then moving the sell stop order to below the recent low of $33.520 is appropriate. This (almost) ensures that at the very least, no money is lost on the trade.
If you are interested in learning the exact details that signaled a buy for Agilent, then sign up for the free Trading Patterns Course. All the patterns in the trading course utilize the stop orders you learned about here. You’ll receive the trading course over the next week in your email.
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