Question: Shorting stockis this the correct way?
I'm playing a simulation to learn more about how buying stocks work through investopedia. I made a "Short Stop" transaction at $30/ share. Instead of Shorting it at the market open, I shorted it at a stop price of $30. The current market price is $28. What I was hoping for was that once the price increases, the transaction will go through. However, I'm predicting that the price will eventually fall, hopefully $28 or below at which then I will buy to cover.
Is this a correct way to use the STOP option? Or would I need to buy a limit?
Answer:
Your terms are all mixed up, you need to learn the basics AT LEAST, if you want to succeed in trading.
A Limit order is when you set a price that is not the current price. Ie opening at $30 when the price is $28
A stop order is a preset order to save you from losing more money then you can tolerate.
Also there are
Market order.. is buying at current price.
Profit is preset also, to close your trade at an expected profit target.
Look for books about trading, including arthurs like, Alex Elder, van Tharp, Curtis faith, Mark Douglas. and more. you need to learn before you expect to make a heap of money
You haven't defined your terms. You're already on Investopedia.
What exactly is it you don't understand about the definition of a Stop Entry Order or Limit Order or Stop Loss Order?
It's generally foolish to try to trade the volatile open. But if you are indeed shorting an up-open (fading the open), that would be the way to go for a short-term trade.
Go to your library and get some books on the subject. Investing is complex enough, but "trading" is compounding the complexity by 10.
Once price goes to 30 and executes your short, what's to stop price from just keeping on going higher? Is that a resistance level, a previous low or high, a fib level?
Define your terms and then use the correct terminology. You're trying too hard to sound like a trader before you know what you're doing. There's no such thing as a STOP option. I think you mean a stop "decision." A Call Option or Put Option is something else entirely, with stops also. You don't "buy a limit." That could mean several things. A trader is precise. Use complete terminology if you expect to be understood and communicate. It's a Limit Order.
If price is currently at $28 and you want to sell short at $30, then you would enter a Limit Order to open a new position and sell short at $30. You can then put on a Buy Stop Loss Order at $27 or whatever (10% loss).
I use market orders for 90% of my trades. Stop entry orders get you in on the run or a breakout, but are high risk trades. You are doing the right thing by anticipating price, if it's based on something (you don't say). Your Trade Plan tells you where to enter.
Limit Orders are generally for illiquid or volatile markets. Don't quibble over pennies. If your Trade Plan says to get in, then just do it with a market order. Just be sure to trade liquid stocks during a liquid time of day.
<<<Is this a correct way to use the STOP option?>>>
No. A sell short order is used to open a short position. A stop (aka stop loss) order is used to close a position.
<<<Or would I need to buy a limit?>>>
You want a "sell short" transaction and you want a limit price of $30.00.
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When you specify a limit price for a buy order you are saying that is the maximum you are willing to pay. When you specify a limit price for a sell order (including a sell short order) you are saying that is the least amount you are willing to accept.
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A stop loss order is used to close a long position if the price of the stock falls below the stop price.You close a long position by selling the stock. A stop loss order is used to close a short position if the price of the stock rises above the stop price. You close a short position by buying the stock with a "buy to cover" (aka "buy to close") order.
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A limit order is active as soon as it is entered. A stop order does not become active before the stop price is reached. If you specify a stop price but not a limit price the stop order will become a market order and will execute immediately when the stop condition is reached. If you specify both a stop price and a limit price the order will become a limit order, so the trade will not take place until your limit price is reached.
Example 1:
John and June are both long 200 shares of ABC. ABC is trading at $100 per share. John puts in a stop order to sell the 200 shares of ABC he owns, specifying a stop price of $90. June also puts in a limit order to sell the 200 shares of ABC she owns, specifying a stop price of $90, but she also included a limit price of $89.
After the market closes it is announced that the CEO and CFO have been arrested for filing false financial reports. The next morning the stock opens at $70 per share. Since $70 is below $90, both orders will become active. John will sell his shares for $70 per share because he did not specify a limit price. June's order will also become active but no trade will take place because she specified she was not willing to accept less than $89 per share.
Example 2:
John and June are both short 200 shares of ABC. ABC is trading at $100 per share. John puts in a stop order to buy 200 shares of ABC to cover the 200 shares he is short, specifying a stop price of $105. June also puts in a limit order to cover the 200 shares of ABC she she is short, specifying a stop price of $105, but she also included a limit price of $106.
After the market closes it is announced that the found a way to make automobiles that would get 1,000 miles per gallon and sell for $3,500. The next morning the stock opens at $150 per share. Since $150 is above $105, both orders will become active. John will buy 200 shares to cover his short position for $150 per share because he did not specify a limit price. June's order will also become active but no trade will take place because she specified she was not willing to pay more than $106 per share.