# Stop Orders: A practical guide to using stop orders for by Tony Loton

By Tony Loton

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Extra info for Stop Orders: A practical guide to using stop orders for traders and investors

Example text

32 4 – Trailing Stop Order to Sell For spread bettors and other long-and-short traders, the stop distance would be the distance below the (rising) market price at which an existing long position should be closed or at which a new short position should be opened. When will it work? Your use of a trailing stop order to sell would be considered successful if: • The price rises and never falls back by the trailing stop distance. • The price rises and only falls back by the stop distance (thus triggering the sell order) when a genuine downtrend has established, and ideally – but not necessarily – when your position is in profit.

A trailing stop set initially at 10 points above a price of 200 would buy on a 5% upturn; but by the time the price has halved to 100, the same unaltered trailing stop would require a larger 10% upturn in order to trigger. As described in this chapter, a trailing stop order to buy would be used to buy a security when its price hits absolute rock bottom and then turns upwards. e. to ‘buy on the dips’.

A trailing stop order to sell works exactly like this. As the share price (your tightrope) rises higher, the stop order (your safety net) rises with it – automatically. There is another analogy that I often use in relation to stop trailing stop orders; the analogy of a ratchet. A ratchet is a type of wrench that can freely turn in one direction but which stops (pun intended) turning when the direction is reversed. The trailing stop ratchet turns freely while the price rises, but stops – thereby selling you out – when the price starts to decline.