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The stop trap

  • By Active Trader Staff,
  • Active Trader Magazine
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It’s happened to everyone. You put on a long trade and place a stop-loss order to protect your position. The market is initially moving in your favor, and you move on to other business. When you go back to check your trade a little later, the trade is turning against you. You watch the market approach your stop price, and you fight the urge to cancel your order. Then the market makes a sudden drop — precisely to your stop, taking you out of the market — and then just as suddenly jumps back to the upside. And it keeps going up. You would have a nice profit in hand if you were still in the market, but here you are, on the sidelines, sitting with a loss and wondering what happened. They got you again. Those sharks, those slimy insider market makers, specialists, brokers — whatever — who share information and pick off regular traders like you. No, they didn’t. Not really. Well, maybe they did. But it’s not what you think. One of three quite mundane things probably happened. Read on to learn why this happens and how to potentially decrease the likelihood of it happening again.

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Article copyright 2011 by Active Trader Magazine. Reprinted from the April 2010 issue with permission from Active Trader Magazine.
The statements and opinions expressed in this article are those of the author. Fidelity Investments cannot guarantee the accuracy or completeness of any statements or data.
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