User talk:Jsam0010

Stop Loss Orders A stop loss order may be subdivided in two categories; a buy stop order or a sell stop order. Sell stop order: Let’s assume the investor bought cotton at $115; current price of cotton is $130 and I will set up a buy stop loss order at $125 (above initial purchase price but below the current market price). This means that the trader has given an order to the exchange to close the contract whenever the price of cotton will fall to $125 or less.

Let’s assume that the day after the commodity price falls to $123. In this case, the exchange will immediately close the position of the trader since as mentioned price falls below $125, and this is the closest price to $125 (sell stop order). As one can see, the investor can safeguard his profits in this way, since if the price continues to fall, the price at which the buyer would have sold the commodity will be at $123 (the nearest price to the sell stop loss order). Thus in this case, profit will be 123-115= 8 handles; so 8*$500= $4000 profit.

However, if the price from $130 (current market price) falls drastically to say, $ 107, than in this case, $107 will be the closest price to the sell stop loss ($125), and thus, the contract will be closed at $107. In this way, the stop loss would not walk in favor of the investor since it would lead to losses of ($115-$107= $8) per handle. In fact, losses will be $500*8 handles=$4000. Therefore, this can work even against the investor if the price of the commodity will fall dramatically from one day to another.

The latter scenario has happened to me in reality. At the end of October I was trading comex gold futures. I bought it at $1381.7 on October 15. I set a sell stop loss of $1370. However, it closed at $1336.7 the day after. The latter price is the nearest to the sell stop loss order ($1370), thus my contract was closed immediately. This means that day I suffered a loss of ($1382-$1336.7=45 ticks). Each tick costs $100, thus I made a loss of $4500. Unfortunately, the days after my commodity is closed, gold was rising gradually again!

On the other hand a buy stop loss order should be set always above the current market price. This is used when you enter a short position, therefore when you sell a particular commodity with the intention that the prices will go down and buy it in the future at a low price. In order to protect the losses, if instead as you predicted, the price go up, you may protect yourself through a buy stop loss order. Thus, If the current market price is $30, and say, you make a buy stop order at $38, than if the price increases (opposed to what you have predicted) to $38 or more the contract is closed to protect the investor from prices to increase further.

Limit Orders A buy limit order is when the investor instructs the exchange to purchase a particular commodity at a certain price or less. Thus, let's say the current market price of cotton is $110, so, if the investor instructs a limit order of $105 to buy cotton, this commodity will only be purchased at $105 or less.

A sell limit order on the other hand is a price set up by the investor above the current market price. Thus, if the commodity' current market price is $110 and the sell limit order is $115, thus the exchange will only sell the investor's commodity if the price rises to $115 or more.

Stop Limit Orders A stop limit order is an order placed with a broker that combines the features of stop order with those of a limit order.

A sell stop limit order combines a sell stop order and limit order (not a sell limit order, therefore, the sell stop limit order should not be above the current market price: Let’s assume that a particular commodity is trading at $80 and an investor has put in a stop-limit order to sell with the stop price at $75 and the limit price at $74. If the price of this commodity moves below $75 stop price, the order is activated and turns into a limit order. As long as the order can be filled above $74, the limit price, then the trade will be filled. If the stock gaps down below $74, the order will not be filled.

A buy stop limit order combines a buy stop order and a limit order (not a buy limit order, thus it does not mean that the buy stop limit order has to be below the current market price): Let’s assume that a particular commodity is trading at $80 and an investor has put in a buy limit order to buy with the stop price at $85 and the limit price at $86. If the price of this commodity moves above $85 stop price, the order is activated and turns into a limit order. As long as the order can be filled above $86, the limit price, then the trade will be filled. If the stock gaps above $86, the order will not be filled.