Price Triggered Orders - To temperament with love

People like to invent new names.

SGX call them Price Triggered Orders, some brokers call them Conditional or Contingency Orders, while traders just call them Stop Orders.

A Stop Order is just an instruction to automatically trigger a Market or Limit Order when a pre-determined price level has been hit. (Stop reading if you don't know what is a market or limit order)

1)  It can be used as money management tool to limit our losses:

Bought stock ABC at $1.00; set a Stop Order to sell if  and when the price drops to $0.90 - that's if a 10% loss is the most you can stomach.

2)  Or it can be used to protect our profits:

Bought stock ABC at $1.00. Price now is $1.50. You set a Stop Order to sell when the price retraces back to $1.30. 

3)  Less well known to retail "investors" is that Stop Orders can be used to initiate new positions to trade break-outs or for momentum plays.

Price of stock ABC has been ranging from $1.00 to $1.20.

If you are long, you set a Stop Order to buy when the price breaks above $1.25.

If you are short, you set a Stop Order to sell when the price crashes below $0.95.

I know, its quite counter-intuitive if you new to trading or only know about Value plays. Why buy at $1.25 when we can buy at $1.20 and below???

Don't ask me. You go ask your broker or your trading guru lah!

4)  Go fishing.  Once you have setup your orders in the morning, you can go drink kopi and don't have to stare at screens if you not intraday trader. You're either stopped-out with a loss, made money, or the trades get unfilled when you check in the evening.  

Of course there are more advanced order types like One Cancel Other (OCO), If Done, Iceberg, and other variations. They are not difficult to understand if you understand the basics of Stop Orders first.

However, the question to ask is why are you bothering with them if you are not a hard core trader?

Keep things simple.

The Mind or Mental Part is the killer

OK, that's the mechanics. Its the easy part.

If you are struggling with the mechanics, you may want to pause and take a hard look at yourself in the mirror and ask whether you are cut out to be a trader.

Remember, no shame.

Most retail "investors" are failed traders.

You have the company of the herd. You are the majority. You are legion.

Ready? Here's comes the hard part.

Stop Orders are double-edged swords.

What usually happens for point 1 and 2 is that once your stops have been triggered, stock ABC will zoom all the way to $2.00!!!

OK, point 2 not so bad; make less better than point 1. Ouch!

As for the scenario under point 3, what happens? Studies have shown that 70% of breakouts end in failure. Yup, got tricked by false breakouts...

You think so easy enter orders in the morning and passive passive make money when you return in the evening?

Why the mental part is the killer? (Tipping my hat to coconut)

Imagine being stopped-out at a loss under point 1 at $0.90.

Next day the stock has a strong reversal day and now price has soared back and just broke $1.10.

What do you do?

Stare at screen and curse your "bad luck" or "blame" whoever introduced you to Stop Orders?

Do you have the mental strength to jump right back into a trade you've have just exited at a loss, and re-enter at a worse off entry price than before?

Now that's the rubber hits the road moment when you discover whether you have what it takes to be a trader!!!

Don't look at me!

I just suck thumb and crawl into my foetal position when it happens to me....