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A stop order works in that a trade is executed up to a very specific total. The target price that you want the trade to move to is the stop price.
Let’s say you have a stock trading at $20. You could place a stop order stating that you want to sell the stock at $17. The order will be kept in place by your broker. The stock will then be sold when it actually reaches $17.
This move helps you to keep your stock in check and also keeps you from losing money. It could also help you realize a profit. For instance, you could set the stop order at $25 for the same stock trading at $20. This allows you to sell the stock when it moves up to the $25 mark. You can use this strategy if you are concerned about spikes in the value of a stock or if you notice the stock is growing but is not necessarily consistently. This ensures you will realize a better profit from the stock.
You can also do this if you have held onto a stock for a while and you want to ensure a profit. You might have a stock that you bought at $15 and it has moved up to $20. A stop order of $18 could be placed so that the stock will be sold when it reaches $18. This ensures that you will still have made an overall profit from selling your stock as you will get $3 per share from the investment.
As appealing as a stop order might be, you have to be realistic when making it. Look at how a stock has been performing and if you can notice any distinct patterns moving along as the stock develops. You can use this to decide where a stock might potentially move. Knowing how this works helps you to get a better idea of what could happen within the stock you want to work with.
Some trades might not support stop orders. A short sale might not be allowed with stop orders although some brokers might let you do this.
Using Multiple Stops
One idea to consider is to establish several stops within the same investment. At this point, you would plan stops both above and below the current market value. You can use this to protect yourself from both significant losses and from cases where you might emotionally hold onto a stock for too long after it goes up in value. Of course, having multiple stops will keep you from possibly making a decent profit. The key here is to keep your investment active and capable of producing a decent profit.
