Example of a stop order
Let’s say you want to go long on Apple shares and place a stop-entry order. You’ve conducted your own analysis and believed that Apple shares will likely go down briefly in a ‘dead cat bounce’, then rise again. Your prediction is that this will happen when the Apple share price, which is currently at 147.50, drops to 145.00.
So, you decide to open a CFD position at $10 per point and set up a stop-entry order to automatically buy (go long on) Apple shares when the price hits 145.00 (buy price 145.10 and sell price 144.90). The margin requirement is 20%, so you’ll have to put down $290.20 to open your position (20% x [145.10 x $10]).
If the Apple price rises again from this point, you’ll automatically have an open position as your stop-entry order will be executed. However, you have a limit on the amount of initial loss you’d be prepared to weather to ride this ‘dead cat bounce’ market move, so you also place a stop-loss order at 134.50. If the Apple share price drops by this much, your stop-loss order will automatically close out your trade, preventing further losses.
If your stop-loss were to kick in at 134.50, you’d make a loss of $106 ([134.50 – 145.10] x $10). However, if the dead cat bounce you were predicting materialises, and the Apple share price rallies to 159.50, you’d make a profit of $144 ([159.50 – 145.10] x $10).
