How effective are sell stops?

[WestCoastWilson]

As I get ready to hopefully swing trade and play with real money, I want to use a ‘sell stop’ on all of my orders, yet I am wondering about their effectiveness (with special regard to stocks doing a 1,000,000+ daily volume).

In my case, I am interested in POT. It has an average volume of 10,681,900. I will use Friday information to simplify what I would like to do. Opening price on Friday for POT was $194.55, closing price $202.27, low of the day was $189.16, high of the day was $205.64. So in my case (if I was using real money), I would have wanted to buy 50 shares at the opening price of $194.55, yet put a ‘sell stop’ in place at $196.55. So seeing that this stock had a high of $205.64, my order would have been triggered (Right???), and the 50 shares would have sold. So not including broker fees, I would have got a profit of $100 in this case??? Is this pretty much how this order would have played out from start to finish? Am I missing something? I have heard that due to the way that stocks fluctuate throughout the day, it is hard to sell your stock at your exact limit price on your order, because of the lightening speed of the up and down movements of the stock, thus the ‘stop sell’ order my give you a few cents above your limit or it may end up giving you a few cents below your limit. Is this true? Also I have heard that if you have a lot of stock to sell with a ‘sell stop’ in place, if there are not enough buyers, then your order is partially filled until enough buyers can be found to buy at the ‘stop sell’ price. Is this true? If so, does the order stay open for hours or days until it can be filled, until buyers can found to buy the stock at the ‘sell stop’ price? If this is true, would it just be better to buy a low volume of stock (say a few hundred shares, less than one thousand shares), get a ‘sell stop’ so I can easily get rid of all of my stock when the stop kicks in?

Yet I figure if I put a ‘sell stop’ on all of my buys, it sounds like I should be perfectly safe (unless that stock plummets in value). Yet if ‘sell stops’ work as easy as it seems, why isn’t EVERYBODY buying with a ‘sell stop’ in place? As this seems like a guaranteed way to safely make a profit (if the stock is on an ‘up’ trend). Then again, I could be understanding this all totally wrong, because right now it just sounds way too easy (unless the worse happens and the stock never reaches ‘sell stop’ limit and only plummets in value).

Initially (a few months ago) before consider using stops, I had just planed to buy a stock one day and sell the stock a day or two later or maybe even a few weeks later (after it went up in value), however when the ‘bear’ market was declared a few weeks ago, ALL of my paper trade stocks plummeted to far below the value I would have paid for them (if I had been using real money), yet as of today, none of those stocks have recovered, so I am STILL at a HUGE paper trade loss. So I am trying to figure out if using ‘sell stops’ would help me make some small profit, before a stock plummets in value.

I would appreciate any help in clarifying what I should expect (using my example). Thanks Everyone!

Wilson

[LongArm]

So in my case (if I was using real money), I would have wanted to buy 50 shares at the opening price of $194.55, yet put a ‘sell stop’ in place at $196.55. So seeing that this stock had a high of $205.64, my order would have been triggered Right???
You can't place a sell stop above the current price, only below it. You need to use a LIMIT SELL in this scenario. The limit sell means you'll sell only at $196.55 or above...or not at all.

Yet if ‘sell stops’ work as easy as it seems, why isn’t EVERYBODY buying with a ‘sell stop’ in place? As this seems like a guaranteed way to safely make a profit (if the stock is on an ‘up’ trend). Then again, I could be understanding this all totally wrong, because right now it just sounds way too easy (unless the worse happens and the stock never reaches ‘sell stop’ limit and only plummets in value).
Profit stops (limit sells) can be good or bad...they're certainly not a "guaranteed way to safely make a profit." Like you say, trends change and the price may never reach your target. Also, if you tend to set your target prices too low, you'll miss out on larger gains which can hurt your overall long-term performance. Profit stops and protective stops are interrelated and determining where/how/whether to use them in order to maximize returns is not a simple thing.

[WestCoastWilson]

Thank you very much for your help on this LongArm. As always, I appreciate your knowledge and wisdom.

Just so that I understand you correctly in regards to my mock trade scenario, if I purchased my 50 shares of POT last Friday at $194.55, I would need to put in a ‘limit sell’ order set at $196.55, then at some point during that day (with the high of the day being $205.64), the ‘limit sell’ would have triggered, thus selling my 50 shares for a profit of $100 (not including the broker fees)??? :rolleyes2: Also when you said "The limit sell means you'll sell only at $196.55 or above...or not at all.", about how much can you get ‘above’ the sell price in most cases?

Thanks again for your help LongArm. :top:

Wilson

[LongArm]

Just so that I understand you correctly in regards to my mock trade scenario, if I purchased my 50 shares of POT last Friday at $194.55, I would need to put in a ‘limit sell’ order set at $196.55, then at some point during that day (with the high of the day being $205.64), the ‘limit sell’ would have triggered, thus selling my 50 shares for a profit of $100 (not including the broker fees)??? :rolleyes2:
That's right, assuming it actually sold at your limit price.

Also when you said "The limit sell means you'll sell only at $196.55 or above...or not at all.", about how much can you get ‘above’ the sell price in most cases?
Usually, you'll get the sell right at your limit price, but in a fast-moving market, you may occasionally get a few cents more.

[WestCoastWilson]

Thanks LongArm.

Other than the stock never reaching and or over going above my ‘limit sell’ price and or the stock plummeting in value, are there any other factors that you can think of that would cause my stock not to sell at my limit price? I am aware there may not be enough buyers on hand to buy my stock if I have too much to sell all at one time, however that is why I plan to stick with a high volume stock (i.e. stock that has an average volume of 1,000,000+ and is currently doing over a 1,000,000+ per day volume), plus I will try not to buy thousands of shares and try to focus on just buying hundreds of shares (to make selling my shares quicker). For sure, I want to learn all I can before I pull out my cold hard cash, yet I want to know what other dangers await for me ahead (based on my original scenario). For sure I want to learn why I might not be able to sell my stock at my limit price (if I set my limit for a price lower than what the daytime high ends up being for that day). :confused:

Thanks again for your help, LongArm! :top:

Wilson

[mjl3434]

Trailing stops (http://www.investopedia.com/terms/t/trailingstop.asp) are better (IMO) especially after you are into the profit range. It allows you to hold onto the stock as the price goes up, but then sells if it drops too much. Here's a hypothetical situation where it would be great:

1) Buy @ $100 with a profit target of 10%
2) Stock goes to $110
3) Put your trailing stop in at $-2
4) Stock keeps going up beyond $110 to $120
5) Stock drops to $118 and is sold automatically

[WestCoastWilson]

Thanks Mjl3434. I appreciate the great example you provided for using a ‘trailing stop’. For sure, it is something for me to consider using. I guess with the various ‘stops’ out there, I need to read up more on them to better determine which one(s) would be most effective in my swing trades when there is a ‘bear’ market and ‘bull’ market.

Mjl3434, thanks again! :top:

Wilson

[wallstreetsedge]

only use stop losses if youre swing trading or holding longer term. using it for shorter term trading is almost useless. institutional traders can still see sell stops as if you had a limit order in and will normally push stocks into one direction to trigger them

[LongArm]

Other than the stock never reaching and or over going above my ‘limit sell’ price and or the stock plummeting in value, are there any other factors that you can think of that would cause my stock not to sell at my limit price?
Well, if it goes ABOVE your limit sell price, you'll likely get the sell. Remember, with a limit sell, the sell occurs at the limit price OR ABOVE. If you get lucky and the stock gaps up overnight, for example, you could get your sell at a much better price than you had expected.

Generally, with a high-volume stock, the reason you wouldn't get your sell (other than the stock not reaching your limit price) is because your limit price was hit but then dropped back down before your order executed. Limit orders don't typically execute as fast as market orders because market orders and any other limit orders ahead of yours at the same price have priority.

I agree with mjl3434 that trailing stops can be a good tool, depending (like everything) on your strategy, time frame, etc. I also tend to agree with WSE that stop losses (which I don't consider trailing stops to be) should not be placed ahead of time, but rather residing in that thing we laughingly call a brain, if possible (or written down on paper if you're over 40 like me ;)). IMHO, all traders should have that line drawn in the sand, though, one way or the other.

[Flyboy]

Trailing stops (http://www.investopedia.com/terms/t/trailingstop.asp) are better (IMO) especially after you are into the profit range. It allows you to hold onto the stock as the price goes up, but then sells if it drops too much. Here's a hypothetical situation where it would be great:

1) Buy @ $100 with a profit target of 10%
2) Stock goes to $110
3) Put your trailing stop in at $-2
4) Stock keeps going up beyond $110 to $120
5) Stock drops to $118 and is sold automatically

Bullet 3.....are you saying to put the trailing stop in at some point after you already purchased the stock and it has begun to rise? Can this be placed at the same time the initial trade was placed?

TIA, Paul

[LongArm]

You can place a trailing stop any time you like (assuming your broker offers them).

[WestCoastWilson]

Thank you WallStreetsEdge, and LongArm. As always, I greatly appreciate your help and additional input at any time. Based on this newest information that you two have just provided to me, it really does give me a lot of food for thought. I will take a few days to dissect all of this so I can make better notes for myself. For sure, this is a great and valuable learning experience for me. :eek2:

On last thing LongArm, when you said "Limit orders don't typically execute as fast as market orders because market orders and any other limit orders ahead of yours at the same price have priority.", this sounds like it can be a problem, especially since I want to try to get my ‘exit’ order filled (by having a stop in place), so I can try to capture something close to my own estimation of what the daytime high might be on an upward stock. Yet "I think" some of the best advice that I have been given was to always try to buy a high volume stock (i.e. 800,000+), yet the more-and-more I think about this, I think I want to exclusively stick with stocks that have an average and daily volume of 1,000,000+ , while my selling less than 1000 shares, to try to better get my ‘exit’ orders quickly filled. Right now, it sounds like my biggest problem of trading like this would be if my limit price was hit but then dropped back down before my order executed. MAJOR FROWN!!! 8O My GOSH, I wonder how often does this happen to people or is it so quick, they never know about it . . . yet I guess I would worry and wonder if my order did not fill when I am looking at the ‘high’ and ‘low’ of the stock that day (after the market closed) and see that my limit price was reached at least at one point during the day, yet my order is still sitting there un-executed. MAJOR FROWN!!!

Thanks! You two are AWESOME!!! :ciao:

Wilson