Thursday, 15 August 2013

'Stop Sell Order' in stock trading

I would like share my experience with a particular stock I traded and the lesson I learnt from the process.

I had bought this penny stock (priced below a dollar) in Toronto Stock Exchange (TSE) and held it for couple of weeks expecting the price to go up. It did once for a short period of time but started dropping since then. However, I wasn't ready to sell it, instead I bought more of the same stock expecting the price to go higher.

After a few days, to my surprise and disappointment, the stock was delisted from TSE. It wasn't a total loss for me as the company did not go bankrupt; the stocks were transferred to another exchange. Even though I had the option of selling the stock at this other exchange, I was reluctant due to the very high trading fees we have to pay to trade at an exchange overseas.

From this I learnt it is important to minimize losses in stock trading in addition to focusing on making profits. Since then, I place a stop order at the very moment I buy a stock. Stop order helps to minimize losses.

Stop Sell limit order has 3 factors:
1. Stop price - the price at which you want to your stop order to become a limit order.
2. Stop limit - your 'ask price' for the limit order.
3. Quantity - the number of shares you would like to sell.

Note that, there is a difference between 'Stop Order' and 'Stop Limit Order'. The difference is 'Stop Limit'. In a 'Stop Order' there is no 'Stop Limit'. In this case, when the 'Stop Price' is triggered, the 'Stop Order' becomes a 'Market Order'. On the other hand, in the presence of a 'Stop Limit' price, when the 'Stop Price' is triggered, the 'Stop Order' becomes a 'Limit Order'.

By placing a stop order we can minimize losses. We do not need to keep checking the prices all the time to place a sell order. Stop order will take care of it.

I use the following to determine my stop price:

SP  =  (PP * Q + 2 * TF ) *  0.9 / Q

SP  - Stop Price
PP  - Purchase Price
Q    - Quantity
TF  - Trading Fee
0.9 - This value is chosen as my loss threshold

Let us consider an example. Suppose  we bough 100 shares at $10.00 each and the trading fee is $30 per trade. Thus, PP = 10, TF = 30 and Q = 100. Hence,

SP = (10 * 100 + 2 * 30) * 0.9 / 100 = $9.54

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