Stop Orders: A Practical Guide to Using Stop Orders for Traders and Investors

By Tony Loton

Quick Summary

A focused, practical guide devoted entirely to the mechanics, strategies, and nuances of stop orders -- one of the most important but frequently misunderstood tools in a trader's arsenal. Loton covers all varieties of stop orders (stop loss, stop entry, trailing stops), explains how they work from both the buy and sell sides, distinguishes them from limit orders, and provides practical guidance on where to place stops to protect capital without being stopped out prematurely by normal market noise.

Categories

• Trading
• Risk Management

Detailed Summary

"Stop Orders: A Practical Guide to Using Stop Orders for Traders and Investors" (2014) by Tony Loton is a 234-page guide that provides comprehensive coverage of a single but critically important trading tool. The book's focused scope allows for a depth of treatment that broader trading books rarely achieve on this topic.

Chapter 1: Orders, Stop Orders, and Their Many Flavours establishes the taxonomy. Loton carefully distinguishes between different order types and their mechanics:

• A stop order to sell executes when price falls to a specified level. It "always triggers from above, when the price falls to the level you set." This is contrasted with a limit order to sell, which "always triggers from below, when the price rises to the limit you set." Stop orders to sell are commonly used as exit mechanisms (stop losses) by long traders.

• A stop order to buy executes when price rises to a specified level. It "always triggers from below, when the price rises to the level you set." This is contrasted with a limit order to buy, which "always triggers from above, when the price falls to the limit you set." Stop orders to buy are used by trend followers as entry mechanisms (breakout entries) and by short sellers as exit mechanisms (short covering stops).

• A trailing stop order to sell follows price upward at a fixed distance, never moving downward. It executes when price falls from any peak by the specified amount. This is the trend follower's core exit tool, designed to let profits run while defining a maximum acceptable giveback.

Chapters on Stop Placement address the critical question of where to place stops. Loton covers several approaches: fixed-distance stops (placing stops a set dollar or percentage amount from entry), volatility-based stops (using Average True Range or standard deviation to set stops that account for normal price fluctuation), chart-based stops (placing stops below support levels or above resistance levels), and time-based stops (exiting positions that have not moved in the expected direction within a specified time period).

Chapters on Common Mistakes address the pitfalls: placing stops too tight (getting stopped out by normal noise before the trade has time to work), placing stops at obvious levels where market makers and algorithms can trigger them, not using stops at all (the most dangerous mistake), and moving stops against the position (widening a losing stop to avoid taking a loss).

Short Selling chapters explain how stop orders work in reverse for short positions -- where a stop order to buy serves as the protective stop, and a stop order to sell serves as the entry mechanism.

Advanced Topics cover the interaction between stops and position sizing (the stop distance directly determines position size for a given risk amount), the psychology of accepting stop losses as a normal cost of doing business, and the impact of gaps and illiquid conditions on stop execution.

The book is notable for its precision of language. Loton carefully avoids the confusion that plagues many discussions of stops by consistently specifying whether a stop triggers "from above" or "from below" and whether it is being used for entry or exit. The comparison with limit orders throughout helps readers understand the complementary roles these order types play.