| STOPs are one of the most confusing issues that we are asked about. They are a means of submitting a market order without executing it immediately, and yet keeping it alive until it is executed at a later preset value. |
| A typical use of the term in practice or placing an
order would be something as follows: I want to sell 500 shares of XYZ at $34.75 STOP. I want to buy 500 shares of XYZ at $37.25 STOP. I was long 500 shares of XYZ for about a month until I was STOPPED out. |
| You can think of the word Stop, as being an instruction to the floor trader to wait until your price is traded at and then he is to STOP what he is doing and set your order as active so that it may trade next. |
| This is where the confusion occurs. The price which you set it NOT the price that you will trade at. That is the price that will alert the floor trader that you NOW want to execute your market order. |
| Once your market order is in place, then you will be traded in the queue with the market orders that are standing in line to be traded. Sometimes your order will fill very near that triggering price, and other times it will be traded with a group that was so large, because they also had their trigger prices set to the same value as you did, that by the time your order reaches the front of the line the price will have moved a considerable distance from the triggering price. |
| Stops can serve a very important function when trying to enter a moving market where you can not keep watching and waiting, but you want to get in only if it moves a given amount in the correct direction. |
| They can also be used successfully to close a position if the market moves against you during the trading period when you can not be watching the market. If you were long a position, you would set your stop at a level just above where you would want to take your profits. If the price would begin to drop and continue to the point where the stock was traded at the price you had your stop set at, then the next your order would become a market order and executed in the next queue of trades at the then current market price. |