Monday, June 4th, 2007

Why I use buy stop orders to catch explosive growth stock breakouts

One comment

One of the tactics I employ is the use of buy stop orders (also known as contingent orders) to catch growth-stock breakouts.

A buy stop is an order given to a broker to buy a stock when it hits a certain price.

For example, if a stock has been bouncing up and down between $9 and $10 for a considerable period, I like to buy when it moves above the $10 mark.

So I place an order to buy the shares as soon as it trades above $10, at say $10.01 or $10.05 etc.

Why do I do this? Firstly, I work full time and don’t have time to watch stocks in real time.

A lot of people who work full time buy stocks the day after they’ve broken out of a trading range.

But I’ve found that most stocks move too far when they break out. This is a problem because I like to set my stop losses (the point I recognise a trade hasn’t worked and therefore sell out) below a trading range.

So in the example above I would put my stop at just below $9.

Using the buy stop increases the reward-to-risk ratio of my trades. This is illustrated in the chart below (click on the image to view).

breakout.GIF

By using the stop buy I get in earlier and have to risk less on the trade.

Yes, slippage can be a problem. But I’ve found that it’s a better option than waiting for a stock to have broken out before buying.

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One Response to “Why I use buy stop orders to catch explosive growth stock breakouts”

  1. Fran Says:

    Hi
    I also like to buy breakouts I think is the safest way, the problem that I have is that many times the stocks goes below the breakout point but does not go below the previous corrrection low, the problem is that the previous correction low may be very far away from the breakout what you normally do on this circumtances
    thanks


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