The Importance of Stop Orders

Limit your losses and maximize your gains with stop orders

A stop order is an order to buy or sell a security when it hits or passes a certain price level. Traders and investors typically use these orders when they have to step away from their computers for a minute, an hour, a day or even a week. However, these orders are also used for day and swing traders who are having trouble multitasking while trading multiple stocks. Regardless of your investment objectives, stop orders are some of the most helpful tools you can utilize.

Stop orders allow you to stick to your plan, taking your profits or cutting your losses ASAP. Technical traders will place trailing stop orders below major support levels. You can do this by using a stop on quote orders that will initiate a buy or sell order at a specific price for the security. Another beneficial method is to place your stop-loss order under a major resistance level so that you are the first to get filled prior to a pull back or reversal.

As for cutting losses and taking profits in general, it is very useful to implement stop orders into your investment strategy regardless of your objectives. Cutting losses and taking profits are always vital in sticking to your plan. For example, if you shoot for a 10% return on each trade, you can set a stop-loss to take those profits immediately when that price level hits.

Do these orders sound too good to be true? They are... almost. There is never a 100% guarantee that your order will fill. Chances are, if you are trading or investing in volatile stocks then your stop orders will not fill some of the time. If you are following the stock close enough, you will be able to see what intervals it moves by in order to place your stop orders on the correct price level so that they are more likely to hit.

The other relatively large downside to using stop orders is that a short-term price fluctuations may cause your stop orders to fill. While this can seem like a bad thing for your trailing stop-loss order, many of the penny stocks recommended in The Bowser Report are stable companies. One of the factors that The Bowser Report likes to work into their analysis is finding companies with large potential. For example, Command Security Corporation (MOC) was an old Bowser stock pick that is a great company awaiting any large contracts. With any large contract, the price per share would fly. Soon after recommendation, the company received a huge government contract and its stock price spiked 300%. If you had a stop order for a 100% gain after recognizing the potential, then you would’ve maximized profits and stuck to your investment objectives. The stock was then dumped by investors within the same day, erasing almost all gains. In this situation, your stop order would have filled to lock in your profits and you would have avoided the downside.

The example using MOC shows that not all short-term fluctuations will hurt you if you have stop orders in place. To begin using them, first consult your investment strategy. Then, figure out where these orders are appropriate and place them through your brokerage.

For example, the Bowser Game Plan recommends selling half your holdings at double your purchase price. Set a stop order for half of your holdings at two times the purchase price of each of your stocks. The Bowser Game Plan also recommends cutting your losses when the company drops 50% from your purchase price without doubling. Set an order at one half of your purchase price for each of your stocks.

Stop orders are very useful if you utilize them consistently and properly while sticking to your investment objectives. Good luck!

The Bowser Report is a monthly financial newsletter that specializes in small stocks trading for $3/share or less. Our goal is to provide the individual investor with relevant information on microcap stocks. Each month, we recommend a new company, provide information on past recommendations and report news surrounding the microcap marketplace.

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Information in this blog post may contain references to past Bowser recommendations. This blog post contains no recommendations, and instead relies on data gathered on past recommendations from sources thought to be reliable.

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