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The problem with limit orders is that your order may not get filled at all, particularly in a fast-moving market. The price may simply move beyond your limit before you get executed. |
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A stop order is an order to buy or sell a security once the security has traded at, or better than, the price you state. Stop orders tell your broker to initiate a trade at some time in the future. Nothing happens until your stop price is reached. |
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For example, suppose IBM is trading at 74 and you want to buy it when it reaches 75. You can place a stop order to buy IBM at 75. Once IBM trades at 75 (the stop price), your stop order becomes a market order. |
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Most of the time we don't like to use "plain" stop orders because they become market orders. (You DO remember how we feel about the risks associated with market orders, don't you?) |
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A stop limit order solves that market order problem. You give your broker the stop priceIBM at 75. Then you state a limit price75 5/8. The effect of this order is that once IBM trades at 75, your stop limit order becomes a limit order at 75 5/8. The result will be either an execution between 75 and 75 5/8 or no execution at all. Stop limit orders give you maximum control over your price execution. |
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Oops . . . there's a problem. You can't issue stop orders to Nasdaq or to the ECNs! That's where an advanced electronic trading platform (see Chapter 6) from your direct access broker will prove to be a lifesaver. Virtually every direct access electronic system we have tested has some form of "alert" that will allow you to set and manage your own stop orders. As soon as the desired price level has been reached, the system will alert you and you can place your execution order immediately. |
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Here is a simple suggestion that will be worth a lot of money to you: Do not trade without the ability to use stop limit orders! |
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In addition to the above types of orders, you also can specify how long they are in effect: |
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Day orders. This order is cancelled if not executed on the day it is issued. |
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