Monday, June 4th, 2007
Why I use buy stop orders to catch explosive growth stock breakouts
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).
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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