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Stop Loss Orders And Limit Orders Explained - When And How To Use It - Trading Basics - YouTube
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Let's talk about the
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difference between a
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stop order
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and a limit order.
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What is a limit order?
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What is a stop order?
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When do you use what order?
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And you see, this is extremely
important
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because as you'll see in just a
moment,
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when you try to enter
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or exit a trade,
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and you are using the wrong order,
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you will lose money.
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You need to know which order to use
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for your entries
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and for your exit.
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So, let's actually jump
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here on the whiteboard.
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Let's actually draw
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a little bit. So,
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I want to draw a stock price.
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So, this is a chart here,
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and I want to draw a line in the
sand
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here where I say,
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okay.
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So, let's say
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we specify a level
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of 100
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and now let's say that we are
betting
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on a market that is going up.
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So, this means that we want
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to buy a stock.
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If we want to buy a stock,
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as soon as it crosses
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above 100, we
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would specify that we buy
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the stock, which could be for
example,
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Apple at
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100 stop.
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This means as soon as Apple
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moves above 100,
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buy it.
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On the other hand,
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if we want to buy Apple,
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and pay a maximum price
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of 100, this is
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when we say,
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OK.
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I should have probably drawn it
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slightly differently...
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Let me do this.
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Let me just move this above
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because then it might actually make
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it a bit easier.
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Look at this,
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what I can do here
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on my handy dandy notepad.
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OK,
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so on the other hand,
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if you want to buy Apple,
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and want to pay a maximum
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of $100, you
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would say,
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buy
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AAPL.
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Apple.
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At 100 limit.
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So, what is the main difference
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between a stop
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and limit order?
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A stop order is being executed
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as soon as prices move
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above the price,
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if you're trying
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to buy it,
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right? So,
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as soon as we move above 100,
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you're buying it.
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So, if Apple opens
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the next day at 110,
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you're buying Apple at 110.
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On the other hand,
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if you are specifying a limit
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order of 100,
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meaning that you only want to pay
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a maximum of 100,
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and the next day Apple opens at
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110,
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you would not get filled because
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you specified that you only want to
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buy if you are
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below 100.
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Is this making sense thus far?
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Okay. So,
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then let me explain the
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same thing for
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the downside, if you are trying
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to sell something.
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We are drawing a quick chart here
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and we are putting in a level
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of $100, but
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now, the major difference is
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that instead of buying,
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we say we want to
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sell a stock
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because when you sell a stock,
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it is the exact opposite.
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Again, when you are buying
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and you specify $100 stop,
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your buying when it moves above.
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When you are selling
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and you are betting on a falling
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market, if you say
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sell AAPL
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at 100 stop,
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it means that you're selling it as
soon
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as it goes below
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$100.
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Now on the other hand,
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if you're specifying
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a sell order to sell
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AAPL
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at 100 limit,
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it means that this is being executed
if
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prices are above 100.
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So, might screw a little
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bit with your brain.
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The good news is you can print it
out.
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You can put it on a post-it
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and you can do it on
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your screen.
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So, let me give you the short cut
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of when I use what
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order.
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So, let me give you the shortcut.
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The way how I personally trade,
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for my entry order,
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I always use
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a stop order,
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and this is what we talked about
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because I want to make sure in a
rising
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market,
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that we move above the previous
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day's high and only when we do this,
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I want the order to be executed.
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So,
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for my entry order,
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I am using a stop order.
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For my stop loss,
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and the name kind of says it
already,
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I'm using a stop order
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because I want to make sure
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that if the trade is going against
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me, as soon as it hits the
predefined
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level,
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then I'm automatically exiting,
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right? So, this is where if
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I bet on a rising
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market, and the stock
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goes against me,
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as soon as it hits my predefined
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level,
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I want to get out of this.
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Now, for my profit
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target,
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I am using a limit
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order because
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I want to make sure
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that I'm taking profits
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as soon as we are crossing
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above a certain level.
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So, this is the shortcut basically.
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So, for your entry order,
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I recommend using a stop order.
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For your stop loss,
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use a stop order.
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And for your profit target,
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use a limit order.
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Is this helpful?
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And again, this is not supposed
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to be a comprehensive
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explanation because as you can see,
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it can get tricky.
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I want you to remember
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this shortcut.
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Now, I want to touch on one
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more order that you might have
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if you are not specifying
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whether you're using stop
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or limit.
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If you are not specifying anything,
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by default,
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you are using a so-called
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market order.
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And when you use a market order,
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this is writing a blank
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check to your broker.
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It means buy
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or sell at whatever price.
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I don't care about the price.
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So, when would you ever use
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a market order?
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Well, for me personally,
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this is the so-called oh
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sh!# order.
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So, it means when you realized
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that you made a mistake...
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Let's say you wanted to buy 100
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shares of Apple,
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but accidentally,
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you bought 1,000 shares of
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Apple.
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In this moment,
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sell,
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sell at whatever price because
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trust me, it usually only
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gets worse.
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Or when you realized that you used
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the wrong order,
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or when you realized that you are in
Lululemon,
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and then you realize: I shouldn't be
in
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there and you just see it's in my
account,
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liquidate it.
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Okay? When you made a mistake,
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liquidate. Write this down.
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It's good one.
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When you made a mistake,
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liquidate.
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That's when you use a market
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order. It is the oops order.
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Other than this, I would personally
never use
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it because it is like writing a
blank
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check to your broker,
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and tells your broker when you say
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buy Apple,
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and you do not specify a price
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and an order type,
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it means buy Apple at whatever
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price is right now available.
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And I like to
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have a controlled entry
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and exit in the market
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so that I know exactly
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at what price I'm getting in
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and out because after all,
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as you know, I am German,
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and I like it to be precise.
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I also like the market to come to
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me and I don't like to
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chase the market.
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This is why I'm drawing these lines
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in the sand
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and then I'm using stop
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or limit order so that my
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order is getting executed once
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the stock crosses this
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line in the sand.
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I hope that you found this helpful,
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and if you did,
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click like, and leave a comment,
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and say, yes.
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This was helpful.
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And I hope that you enjoyed watching
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the show as much as I enjoyed making
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it for you.
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And if you know anybody who might
find
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this video helpful,
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please,
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feel free to share it.
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Because especially the part
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about using a stop
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and a limit order is extremely
important.
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When you use the wrong order,
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you might
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make... Or you might lose money.
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Almost always you lose money because
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you are entering when you don't want
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to enter.
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You all have a fantastic day.
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Enjoy the rest of the day
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and I'll talk to you very soon.
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Click on like,
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and leave a comment,
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and let me know what you think.
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And make sure to subscribe to this
channel
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