At first glance stop orders seem very simple ? a stop order allows you to stop a loss, which of course must be a good thing. But there are various types of stop loss, which can all be used in various ways, and this is what Tony Loton explores in his latest book Stop Orders: A practical guide to using stop orders for traders and investors.
Aimed at both amateurs and professionals, the book begins with a thorough examination of the various orders available, starting with market orders and limit orders before turning to stop orders and their various ?flavours?. Loton looks first at the common stop order to sell; an order designed to execute sometime in the future when the price of a stock has fallen to a level that you have set. Conversely, the stop order to buy is designed to execute sometime in the future when the price of a stock has risen to a level that you have set.
Part One continues with a look at the trailing stop order to buy and sell, as well as the guaranteed stop, the stop with limit, the good until order, and the OCO. The breakdown of each is concise and straightforward, providing a vital introduction for beginners and a great reference for the more experienced trader.
This is followed by a more comprehensive breakdown of each order and how they should be used, with details on exactly what needs to be specified in each case, when each will work and when they won?t. For example, the author looks at the stop-with-limit order, which combines the features of both a stop order and a limit order so that it either executes at the limit the trader sets or not at all. Loton shows that this order can be successful when the market price gaps beyond the limit level, or if it falls continuously towards the stop level and executes correctly between the stop level and the limit level. However, Loton cautions: ?This stop-with-limit order protects you from price gaps that subsequently close ? as they often do. But these orders expose you to gaps that don?t close.?
Part Two of the book ? ?Stop Orders in Practice? ? is dedicated to the use of stop orders in real-life scenarios and real market conditions. This section is much more hands on, and as the author explains: ?If this was a motor vehicle manual, Part One would tell you what the various controls do and Part 2 would teach you how to become a better driver.?
Loton begins this section by describing the subtle differences between stop orders for the different types of traders, e.g. day and swing traders, plus different types of investors and spread bettors. This section also covers some trade maintenance, such as pyramiding and part-closing. He also looks at the financial instruments that will allow stop orders as well as mental/manual stops.
Chapter Nine looks at price gaps and whipsaw losses, specifically how to avoid both and how this will lead to making better decisions about when and where to place the stop orders. Using ?The Tale of Three Traders? Loton examines how price gaps can affect traders and what the trader can do to avoid this situation. These realistic scenarios are very useful when learning how to use a stop order to your best advantage.
Chapter 15 is Loton?s ?Top Tips for Using Stop Orders?; ten key points to bear in mind when trading, plus the bonus tip ?Always respect your stop orders? ? something traders would be well advised to remember when in the markets.
Tony Loton?s Stop Orders: A practical guide to using stop orders for traders and investors is an essential book, covering everything needed to make a stop order work, whether you are a trader, investor or spread bettor. The stop order is an essential tool in the trader?s armoury and Tony Loton?s book shows exactly how to use it.
Title: Stop Orders
Subtitle: A practical guide to using stop orders for traders and investors
Authors: Tony Loton
Publisher: Harriman House
About the author
Tony Loton trades a range of financial instruments including equities, exchange traded funds, covered warrants, and spread bets on his own account. He would describe himself as a graduate of the ?Investment School of Hard Knocks?.
Tony has written regularly for the Barclays Stockbrokers Smart Investor magazine and its associated email programme, and has previously written and published financial titles including Don't Lose Money! (in the Stock Markets), Financial Trading Patterns, and Stock Fundamentals On Trial: Do Dividend Yield, P/E and PEG Really Work?
In October 2008, Tony was featured as a day trader in the Money section of the UK?s Sunday Times.
You can find out more about Tony Loton, his finance books and blog, at www.lotontech.com/money.