Using Stops to Open Trades or Short Positions

As we have already noted the term ‘stop loss’ can be a bit misleading because you can set a stop to lock in profit and open trades as well as control losses.

Let’s look at an example where a stop order is used to open a trade.

Using Stops to Open Trades

In Figure 8 above, you have been watching Allied Domecq for some time and have come to the conclusion that if the price increases from 460 and goes past the previous high of 475 you want to go long. You leave an order to open your trade long at 480. This is a stop order because you are entering the market at a worse price than where it is currently.

Of course you can also use stops for short positions.

If you have gone short and want to control your potential loss you can put a stop ABOVE the entry price. This is a worse price than the current price for your short position so it is a stop order.

You can use a stop to open a short position by placing the order to open somewhere BELOW the current price. This is a worse short entry level that where the price is currently so it is a stop order to open.