Using Stop Orders to Protect Profits on a Short Sale
Stop orders can be used to protect profits on a short sale. If you sell
short a stock at $40 and the stock declines to $32, you might be
reluctant to buy back the short position, hoping that the stock will
decline even further. To protect profits against an unanticipated
price increase, you place a stop order at $34 to preserve your $6
profit per share.
Similarly, use of a stop order can reduce the losses in an
unfavorable short sale. If you sell short a stock at $15, you might
place a stop order to cover a short position at $16. This strategy
limits the losses should there be a rise in the price of the stock.
Without a stop order, the investor potentially could face a large loss
if the stock keeps going up in price.
With a long position in stocks, the most that an investor could
lose is the entire investment (if the company goes bankrupt, and
the stock falls to zero with nothing left for the shareholders).
However, with short selling, if the price of a stock keeps rising, the
losses theoretically could be unlimited.
Selling short may be risky for investors who do not have the
stomach to watch the price of the stock turn in an unanticipated
There are rules governing short sales on the New York Stock
Exchange (NYSE) and the American Stock Exchange (AMEX), as
well as for stocks on the National Association of Securities Dealers
Automated Quotations (Nasdaq). Short sales may not be made
when stocks are falling in price because this will exacerbate the
price declines. On the exchanges, short sales may be made for a
higher price than that of the previous trade, on an uptick, or for a
price that is equal to that of the previous trade but more than the
trade prior to that, on a zero-plus tick.
Categories in Trading Mistakes
Lack of Trading Plan
Planning plays a key role in the success or failure of any endeavor
Using too much Leverage
Determining the proper capital requirements for trading is a difficult task
Failure to control Risk
Refusing to employ effective risk control measures can ensure your long-term failure
Lack of Discipline
A lack of discipline can destroy even the most talented and best prepared trader
Useful Advices to Beginning Trader
You can control your success or failure
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