I CAN answer this one Epicare for you.
the difference between "stop loss" and "stop limit"
It gets a bit complicated, and I have used "stop limit", BUT I would only use that in very specific situations that usually revolve around upcoming news.
OK, same example I've been using.
You bought a $5, it goes up to $15, and you want to protect A PORTION of your profit.
With a stop loss, you would do something like put in that stop loss at $3. And that is the end of it and you know how that works. If it goes down $3, you will sell. If it opens that morning down $5, you will sell. If it opens that morning down $14, you will STILL sell (but this rarely happens for no reason).
With a stop "limit" you elect to put a bottom "limit" at what you are willing to sell at, AND ANYTHING BELOW your limit, you will NOT sell.
I will give you an example of a few ways that will work (trading during the day and trading at market open), and then I will tell you how I use stop limits and why.
Same example, buy at $5, it goes to $15, you put in a "stop limit" for $3 with a "limit" at $5.
OK, now let's say it's a very small, very thinly traded stock and your order is to sell 5000 shares.
It goes down $3 and you sell 1000 shares, it goes down $4.10 and you sell another 1000 shares …… it goes down $5.20 and you WILL NOT sell your remaining 3000 shares because being down $5.20 the price is now BELOW your bottom limit. That can be very bad because if it continues down another $5 you will not sell your shares and will be stuck taking the loss. That stock could end the day at 44 cents and you will still own any remaining shares.
Another example (using different numbers to make the point), you buy at $5, it went up to $200, and you want tp protect a portion of your giant profit.
You stop "limit" at $10 with a "limit" at $20.
OK, bad news happens over night and it opens down $20.10 …. you will NOT SELL because it is below your bottom limit.
SOOOOOOOOOO, if it keeps going down all day, it could end the day DOWN $190 and you still own because you never got to sell because you put in a bottom limit.
So, in general, I don't use stop limits because of the above, if I want to protect profit, I want to protect profit, period.
Now, how and why do I use them.
I own a biotech stock, and I know that phase 2 news will be released in 2 days. I also know/suspect that the news will NOT be great, but it will also NOT be horrible.
And I am going to stop here and say ….. this is why I talk about greed and fear, and the OVEREACTION that ALWAYS happens on both sides.
Think of it like a rubber band being stretched one way or the other.
One way is greed, the other way is fear. People almost ALWAYS stretch it TOO MUCH. And what happens when you stretch a rubber band way out? It bounces back. Believe it or not, that directly relates to stock prices. The down stretch could be fear as fear, it could be fear as profit taking, it could be fear because famous Joe Blow sold.
OK, back to the example.
I bought at $5 and it went up to $200.
News coming out in 2 days, not Great, but not horrible.
NOW, the news could be released before the open, or after the close, or the stock could be halted pending the news (as happens a lot)
What else do I KNOW.
I KNOW people will OVERREACT way too much.
I know that as soon as the news comes out and as soon as the stock opens, the stock price will open at $110 because of fear - panic - rubber band stretch.
It may even continue down to $95 per share for the same reasons.
But what ALWAYS happens (most of the time), a couple of things, some people catch their breath, realize it's not the end of the world or the stock and buy. Other people, greed will kick in and they will buy cheap.
At the end of the day (or a few days), stock is at $175 and the world is fine.
NOW, if I put in a stop "LOSS" at $10, I would have been forced to sell at the open at $110 (losing $90 a share) (which I don't want to do because I still believe in the stock).
BUT with a stop limit at $10 and a limit at $20, I will be protected and NOT FORCED to sell at $110, down $90.
In general, use staggered, trailing stop losses to protect a "PORTION" of your profits. ….. and forget the "limit" trade.
AI
