Many traders rely on stop orders to provide a quick exit in the event that the market trend turns against your position suddenly. However, contingent orders can work as an effective alternative to stops.  This post will discuss how to use a contingent order as a “stop” type order and summarizes key pro’s and con’s for each of these advanced order types.

If you follow the TradeKing All-Stars blog, you may’ve caught a recent post by TK’s Director of Education Nicole Wachs explaining the differences between market, stop and limit orders. It made me think now might be a good time to review a post of my own, on contingent versus stop orders.

These advanced order types look similar on the surface, but they differ in how the orders get routed and what value triggers the trade (Bid, Ask or Last Price). You may find these differences helpful as you consider how to protect a specific position from downside loss. 

After you’ve checked out this post, take a peek at the TK webinar archives for more info. Types of Orders covers the basics in detail. We’re covering advanced orders as an ongoing series, with the first installment on Trailing Stops. The next session in this series will be on Contingent Orders on Thursday, June 25, 8pm ET. Be sure to register.

Now for some final caveats: make sure you read through the full terms and disclosures when using Advanced Orders like these. I’ll highlight one caveat in particular from that list: neither contingent nor stop orders provide much protection if the market is closed or trading is halted during the day. It the stock gaps the downside "protective" order will most likely trigger, but who knows what the next available price will be. These orders can be handy, but they aren’t intended as a substitute for keeping close tabs on the current market action in your position and hedging in advance appropriately. 

Regards,
Brian Overby
TradeKing's Options Guy
www.tradeking.com

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