Success Trading: Yet More Basic Terminology for New Traders

In this day and age of online brokers for virtually every market out there, there are some very useful tools that will help protect your account and lock in profits when you have them. It is our recommendation that you use a good online broker and take advantage of not only the low commissions they offer, but also the automated tools that are available. These tools are virtually idiot proof if you use them. The number one reason that people’s accounts go belly up in the markets is because they lack the discipline to stick with their trading plans and let emotions drive their trading decisions. This approach is a guaranteed way to lose in the markets. Oh, you might get lucky on occasion, but eventually the market will take your money. Let discuss some of the trading tools we’re talking about.

Stop Loss – Also called a “stop”, this is the price at which your position will be automatically closed. If you buy IBM at $50 per share, and then enter $45 as your stop level, then your position will be sold when the price hits $45. So this enables you to protect your account from a large loss. Bear in mind, however, that this stop level only “triggers” the closing of the position and doesn’t guarantee you’ll get out at that price. A quick price drop might mean your order was executed at $42 instead of $45 because of market volatility – but this would be an extreme case. Also, if you carry the position overnight and IBM opened at $40, then that’s the price it would be sold. Keep in mind that if you had “shorted” IBM at $50, then your stop would be placed above $50 to protect your account. When the stop is triggered on a short position, you would be buying to cover the position.

Buy Stop – The description above pertains to a “sell stop”, but there are also “buy stops” that can be very useful. These are used to enter a position at a certain point. Suppose you’re using a trading system requires that you buy when a stock breaks above a certain price level. Let’s say that you are waiting for IBM to break out of a channel and to do so, it would need to reach $51. In this case, you simply place a buy stop at $51 for the number of shares you desire and your online broker’s system will buy that for you automatically whenever IBM hits $51. The only thing you would have to do and check back occasionally to see if the order has been filled.

These two tools, the sell stop and buy stop are invaluable to traders – especially those who are just starting out. Make this a habit from day one in your trading – ALWAYS place a stop loss immediately after getting an order filled. Obey this rule and the market will never hurt you very badly – you’ll take a hard sting every now and then, but you’ll stay alive to come back another day!