There are a few important stock trading terms for beginners that you should learn. Even if you are an experienced trader, reviewing these stock trading terms will help you improve your trading. These are some of the most important stock trading terms and definitions you should know.
Stock Trading Terms Stop Limit
A stop limit order combines two types of orders: stop orders and limit orders. I will quickly review what the different stop orders are, and what the different limit orders are. I will then discuss what a stop limit order is which combines both stop and limit orders.
Buy Stop Order
A buy stop order is when you enter an order to buy at a price above the current market price. Once the stock climbs to that specified price, your buy order is executed as a market order.
Sell Stop Order
A sell stop order is when you enter an order to sell a stock at a price that is below the current market price. Once the stock drops to that specified price, your sell order is executed as a market order.
Buy Limit Order
A buy limit order is when you enter an order to buy a stock at a certain price or lower. Once the stock drops to a specified price or lower, your buy order is executed.
Sell Limit Order
A sell limit order is when you enter an order to sell a stock at a certain price or higher. Once the stock rises to a specified price or higher, your sell order is executed.
Difference Between Stop and Limit Order
The most frequently asked question I get from new traders is, what is the difference between stop and limit orders?
A stop order (also called a stop loss order) is used if you already own a stock and you want to protect yourself if the market drops and you can’t be in front of your computer to execute a sell order. For example, you buy a stock at $20. Now you have to go to work and you want to protect yourself if the market you are trading starts to drop. You set a stop order to sell if the stock falls to $18 or lower.
A limit order (also called a buy limit order) is used if you don’t own a stock but you want to buy it if it falls to a certain price. For example, a stock you want to buy is trading at $20. You have to go to work but you want to buy the stock if it falls to $18 or lower. You can enter a limit order to buy the stock at $18. If the stock falls to $18 or lower, your buy order will be executed.
Stock Trading Terms Stop Limit
Now that you know what a stop order is, and what a limit order is, it’s easy to understand what a stop limit order is.
In both stop orders and limit orders, the trade executes a market order when the target price is reached. In a fast moving market, you could get a horrible fill where you either buy or sell stock at a level way beyond your stop or limit price. The answer to this problem is to use a stop limit order.
For example, let’s say you like the stock ACME, which trades at $15, and you want to buy it if it breaks resistance at $18. You can put in a stop limit order to buy with a stop price at $18 and a limit price at $20. If the price of ACME moves above the $18 stop price, your buy order is triggered and it becomes a limit order. As long as the order can be filled under $20 (the limit price), then your trade will be filled. If the stock gaps up above $20, your buy order will not be filled.
How to Enter a Stop Limit Order in Etrade Pro
Please remember that ETrade Pro is the official platform of GuerillaStockTrading. As a teacher, I do not want to be explaining things 5 different ways for all the major trading platforms. If you are really serious about taking your trading up to the next level and trading at home for a living, you need to open an Etrade Pro account.
Enter ETrade Pro and under “Price Type”, select “Stop Limit on Quote”:
Now enter the “Stop Price”, “Limit Price”, and click on “Buy”:
In the example above, Microsoft is trading at $37.85. We want to buy Microsoft if it breaks through resistance at $39 but if it does a gap up, we don’t want to buy and chase it up too high. We enter a stop price of $39, and a limit price of $39.20. This means that if Microsoft breaks above $39, our stop limit order will turn into a limit order to buy between $39 and $39.20 but nothing higher than $39.20.
Stock Trading Terms and Definitions: Story Stocks
What is a story stock? Story stocks are an integral part of profitable stock trading. It doesn’t matter if you are a day trader, swing trader, or investor, it’s the story behind the stock that will push it higher.
You can think of a story as the engine behind the stock. The engine will drive the stock either higher or lower depending on the story. A stock without an engine is like an empty shell company trading on the pink sheets: no volume thus the stock never moves.
Your ability to determine and then analyze the story behind a stock is critical. You can know nothing about technical analysis and how to read a chart, but if you are good at spotting story stocks, you will make a fortune on Wall Street (just look at Warren Buffett). But the opposite can not be said. You can know everything in the world there is to know about technical analysis and how to read a stock chart, but if you can’t determine the story, you will still end up being a losing trader. Stories are that important folks.
Some people are story tellers by nature. I wonder if they’d be good at stock trading? I suppose being a story teller and learning how to analyze stories are two different things.
Frequently Asked Questions about Stock Trading Terms For Beginners
What are story stocks?
Story stocks are stocks whose value is based on a “story”. A story is the engine that can drive a stock higher or lower.
Penny stock promoters use fantastic stories to catch the public’s imagination. A few penny stock story stocks go on to achieve some success, but most fail to live up to the story hype.
Stories that can power a stock higher are stories that a company is making a lot of money which culminates in a positive earnings surprise, the story that a company has a big drug being looked at by the FDA culminating in an FDA approval, a story that a drug company had a patient with a huge improvement in Phase 2 tests, a company buying another company, rumor that a company will get a favorable court ruling culminating in that it actually does, after a stock is threatened with delisting rumor that it will bring its filings current and avoid the delisting culminating in a press release that all requirements have been met and the stock will not be delisted, etc.
What does stop order mean?
A stop order means an order to buy or sell a stock when its price passes a specified price level. Traders use stop orders to better time their entry or exit.
You will often hear a stop order referred to as a stop, or stop loss order.
Shaun Overton posted the excellent video below called The Difference Between a Stop and a Limit Order.
What’s a stop limit order?
A stop limit order is an order that combines both a stop order and a limit order. A stop limit order will be executed at a certain price or better, when the stop price is hit. Once the stop price is hit, the order becomes a limit order to buy (or sell) at the limit price or better.
For example, say stock ABCD is trading at $15 and a trader wants to buy the stock if it can break resistance at $20; however, he doesn’t want to chase it too high and figures he would be willing to pay up to $25 per share but nothing more. The trader puts a stop limit order to buy with the stop price at $20 and the limit price at $25. If the price of ABCD breaks above resistance at $20 (stop price), the order is triggered and becomes a limit order to buy up to $25. If the stock gaps up above $25, the order will not be filled.
Bionic Turtle posted the awesome video below called Order Types (market, limit, stop, stop-limit).
What are buy stop orders?
A buy stop order is an order to buy a stock that is triggered when the market breaks above a certain price. The buy stop order becomes a market order when the specified price is hit.
Traders use this type of order to buy a stock as soon as it starts to run and breaks above a specified price level such as a pivot, breakout, channel wall break, resistance level break, Bollinger Band break, and so on. By setting a buy stop order in advance, it allows a trader to enter before most other buyers.
Make Money Trading Stocks posted the video below called How to Buy a Stock in the Near Future Using a Stop Order?
What’s a trailing stop order?
A trailing stop order is a stop order that is set to automatically follow the current stock price and can be a percentage or dollar amount.
Traders usually use a trailing stop to sell out of a long position if the stock suddenly sells off. The advantage a trailing stop has over a fixed stop is that it does not need to be reset every trading day.
A trailing stop is placed a specified distance below a long position. A trailing stop is placed a specified distance above a short position.
The way a trailing stop works is let us say that you bought stock ABCD at $20. You could place a 20% trailing stop order which means if the stock drops by 20% or more, the trailing stop will be triggered as your trailing stop turns into a market order to sell the stock.
Traders often use a trailing stop to let their winners run as long as possible as they tighten the trailing stop the longer the stock runs.
Sharekhan SK posted the great video below called How to use Trailing Stop-loss?
InformedTrades posted the excellent video below called How To Use Trailing Stops.
Who can see stop loss orders?
Market makers and specialists can see all stop loss orders. If there are too many stop loss orders at a particular price, sometimes market makers will “run the stops” by pushing the stock price low enough to trigger a bunch of stop loss orders at a particular price. Once the stops have been cleared, the stock immediately reverses direction and rallies.
In 2007, the Nasdaq changed the rules and made it so that stops can trigger at the bid or ask price.
Market makers and specialists know that the stops are sitting there and many times they are gunning for them.
This has caused many traders to quit using stop loss orders and instead use a “mental stop” based on the closing price of the previous day.
Make Money Trading Stocks posted the video below called What are Running Stops? Market Makers and Specialist Feast of the Day.