Reader Question

A reader asks: "Hey Joe! I'm pretty new at this. Can you tell me the rules for buy and sell stops?"

When the market trades above a buy stop price order, it becomes a market order. The first down tick after the market order price is activated determines the highest price at which the buy stop order may be filled. The rule to remember placing stops is this, "Buy above and sell below." Buy stops are placed above the current market price, and sell stops are placed below the current market price. If a buy stop price is "traded through" (both a buy and a sell take place at that price), the order then becomes a market order to be filled at the best price possible. If a buy stop is hit at 40, and the market trades 40, 45, 50, then 45, the worst fill a trader can receive is a 50, because 45 is the first down tick. In general, you must expect to get the worst fill possible. Anything better is a bonus. The exception to this rule is a fast market condition, when no one is legally held to any price.