Traders' views - Spread betting

Stop orders take the stress out of placing trades

By , 01 Jun 2012

Stop orders are a very useful tool for part-time traders. If you don't want to be sitting at your computer all day, waiting for the right trade, this relatively underused tool could be very helpful.

"I knew I should have shorted EUR/USD when it broke below 1.26”. A much-heard phrase from short term traders over the past 10 days, by those appreciative of Europe and its single currency’s woes, combined with the safe-haven appeal of the USD. But many are unhappy at not placing the trade when the currency pair fell below 22-month support, then below 1.26 and down to a low of 1.235 (a decent 250-point move).

Short-term trading is perceived by many to involve watching graphs like a hawk and jumping into trades when opportunities present themselves. This is one way of doing it, but it is not for everybody.

If you were able to identify the potential for EUR/USD to fall further once support and 1.26 was broken, it suggests you are capable of calling potential price direction correctly. This just leaves the issue of timing or placing the trade at the right point.

A relatively underused tool which can remove the issue of timing is stop orders, which can be used when trading shares, commodities, FX or indices. They are orders to automatically open a trade (long or short) when the price reaches a pre-defined level, and executed at the prevailing market price.

You likely already use stop losses and limits to minimise losses/maximise profits. Stop orders work in the same way but rather than close you out of a trade they put you into a trade. (When making a forex trade on BullBearings, Stops are one of the three options under 'When to trade': At best, At limit, Stop. Then, if need be, you can view and cancel your open orders in the Pending Orders section.)

An example trade using a stop order

Coming back to our EUR/USD currency chart, you saw the opportunity for a move down if support was broken, but when it broke below you weren’t watching and thus unable able to open the trade. A stop order could have been placed below support at 1.26, automatically putting you into a short EURUSD position on the break without you having to be watching or directly involved in opening the position.

Do I open now, or wait 5 minutes for a potentially better entry point? How big should I trade? Where should I place my stop and limit? All this can take time and can lead to stress and mistakes being made in the rush of placing the trade. If you are watching the graph trying to time optimal entry you might get tempted to trade bigger than normal or with a wider stop - additional risks if the trade goes wrong.

As a trading tool, stop orders offer the advantage of taking the emotion and stress out of placing the trade. If you are convinced in the potential for a trade opportunity to arise, you don’t have to wait and watch to place the trade. You can decide in advance that if the price gets to X you will enter long/short, in size Y, with a stop at Z and a limit at AA.

Once the trade is placed, alerts (e.g. email, pop-up, text) will tell you that your price criteria has been met and the trade opened.

Trade away from your computer

What’s worth remembering is that you have, in advance, looked at a graph and decided that if the price falls below support that you would want to be short. You are able to place the stop order under calm conditions, and let your trading platform take care of opening the trade if the criteria is met.

You can't be watching your graphs/prices all the time. Everyone needs to step away at some point and it’s a shame to miss an opportunity. The tool can, in fact, free you up to spend time looking for other trading opportunities.

Note that after placing stop orders, they still need to be monitored. Are you still convinced? If so, is the level still appropriate? Do you want to execute a bit higher/lower to avoid being executed on a spike up/down? You might want to amend the entry point to be sure that the price is moving in your direction/has momentum before execution.

Orders that are available on our CFD platform at Accendo include ‘Good for the Day’ (GFD), ‘Good ‘til Date X’ or ‘Good ‘til Cancelled’ (GTC). If you are going on holiday (everyone needs one) and can't monitor orders which are valid for the duration of your absence, it might make sense to note down the parameters and cancel the orders. They can always be re-placed on your return, if still valid. 

 

Warning: Remember, particularly if you are new to trading in the stock market and in forex, that the prices of shares and other investments can fall fast and you may not get back the money you originally invested. The material here is for general information only and is not intended to be relied upon for individual investment decisions. Take independent advice before making such decisions. Also, the BullBearings free stock exchange simulation portfolios are a good way to practice trading techniques.

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