Monthly Archives: February 2010

Why Not To Use Stop Loss Order

Posted by Kamil on February 24, 2010
General / 1 Comment

I’m busy investrader trader. I work full time so it is not easy for me to trade throughout the day. Thus, from time to time (read: sporadically), when I’m going to the meeting with an open order, I need to minimize damage to my portfolio in case something was happening to the stock while I was not looking at its chart. During those times I use stop-loss orders. Stop-loss orders are dangerous and I want to share with you something about them.

A stop order (also stop loss order) is an order to buy (or sell) a security once the price of the security has climbed above (or dropped below) a specified stop price. (Note that both bid and ask prices can trigger a stop order.) When the specified stop price is reached, the stop order is entered as a market order (no limit). This means the trade will definitely be executed, but not necessarily at or near the stop price, particularly when the order is placed into a fast-moving market, or if there is insufficient liquidity available relative to the size of the order.

I filled an order for 400 PFE at $17.90 (its support). I set a stop-loss at $17.78– I like to take tiny losses. While away, look what happened:

For a fraction of a second, the price fell to $17.75! Coincidence? This is what happens when others set stop losses and the movement is bearish– they are being taken out within fraction of a second. More importantly however, stop losses can be seen by market makers and they sure know how to make your life miserable.

Regardless, my stop loss order was not taken out and I’m still in this trade.

Best of all, just see what happened right after:

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