Don’t Confuse Stop Limits with Stops

One of the biggest mistakes I have made was confusing a stop limit order with a stop order. This could potentially be very harmful to your account. A stop order is simple; when you use it you tell your broker “sell my stock once it gets to a certain point”. This way you can effectively limit your potential loss on a stock which would make it easier for you to effectively manage your account. A stop limit order on the other hand tells your broker to sell your stock if it reaches a certain point, but only if you can get a good price. So for instance if you use a stop limit order both the stop and the limit has to be triggered in order for you to exit the position. This can work out ok most of the time, but when it works against your favor it can really be harmful. I had a bad experience with a stop limit order before which is why I never use them to exit out of a trade. I had bought the stock at $93 expecting it to bounce off of support and head up. nI was new to the markets so I figured a stop and a stop limit where the same thing. I placed the stop limit at $90. If it fell to $90 I wanted to get out of the trade and cut my losses nshort. That was the plan anyways, what happened was some bad news came out. The stock gapped down and opened at $88, which triggered my stop. If I had a simple stop order on the stock I would have exited here at $88 and would have cut my losses relatively short. However I had a limit order on it, so I would not get filled unless I could get filled for $90 or higher. Of course the stock kept heading lower and I when I saw my account I was forced to exit the trade at $84, or triple what I wanted my max loss to be. Learn from my mistake if you are going to cut your losses short use a stop, not a stop limit. For more on stop orders visit http://www.stocks-simplified.com/stop_order.html For more on stop limit orders visit http://www.stocks-simplified.com/stop_limit_order.html