VTSO and stop order executions

The Stop Order

(In order to keep some of these older posts current I will comment on the VTSO and stop loss orders here. I have found out that the stop loss and VTSO are no longer available on the TSX market, this has nothing to do with the broker as the exchange just does not support these orders. I had, in the past, placed and had VTSOs work fine so I am not sure at what point this changed.)

(from a previous post)

A Stop order is an order to sell a stock when its' price hits a preset price to lock in a profit (profit protection) or to limit a loss (stop loss) when the price drops. The reverse is true for a short position.

Once the order is triggered it becomes a market order which is an order to sell the stock at whatever price it will go for. The only problem with this is that it COULD sell for less than anticipated due to market conditions...I have had it happen once or twice when the difference was more than just a few cents. There are other concerns but they are less of a concern than not setting a stop at all.

While this is true, generally, I will clarify a few things.

Quotes vs price for market orders.

The price a stock has traded at is history as soon as the trade is made. This means that the price you just saw on the chart may not be the price you will trade at. The quotes, on the other hand, indicate what traders are willing to pay (bid), or accept (ask), for the number of shares indicated.


This is the uncertain future.


Any automatic stop order uses the quotes to determine when the order gets triggered, not the price. So a stop order to close a long position set at $34.00 will trigger and become a market order when the bid hits $34.00 or less. The last traded price could still be well above the $34.00 mark but the market order will likely execute at $34.00 or perhaps less.



This is what the stop order does, it goes by the quotes not by the last traded price.


Virtual Trailing Stop Order (VTSO)


This can be a handy device if used properly. I have tried a number of methods to employ the VTSO and really have found none to be very good mainly due to me having a very tight loss stop in mind. Basically, I was not really using then properly even though they worked reasonably well and I was able to make some decent profits with them. I'll mention the profitable uses later.


In the VTSO you set the price difference you are looking for when you place the order and it adjusts the stop based on the last traded price. Other than this ratcheting of the order price it is the same as a stop order.


For example, you are in a long position and the price is at $34.00 and you determine that you want to sell if the price drops 50 cents. In Questrade's Questrader Pro you select the VTSO box and enter 0.50, it will set the stop at $33.50 immediately and you will see the order in the account box to sell at $33.50. The first time I did this I had to call to verify that is how it worked as I did not want to accidentally sell my position for 50 cents, that would have been a real bummer to find out the hard way.

Interestingly the stop order does not appear with the correct price until a trade has occured.


Now when the price moves up to $34.50 the stop price automatically ratchets up to $34.00 and will not go back down. This continues as long as the bids never drop to 50 cents below the highest price since the order was placed.


Keep in mind that the stop is set by the price but triggered by the bids. This can be a problem at the opening of the market, especially now with the volatility that we are seeing. The bids can be way off of the actual first trade price. Today on a stock that is around $50 I saw the bids over $2 higher than the actual open price...it can be lower just as easily and if the market opens and that low bid stands for the first second you will become the first trade of the day as the VTSO is hit, passed and executed at the fastest possible price.

I have had stops and VTSO's in place overnight and had to either cancel or change them to allow for a huge gap between the price and the quotes for fear of having my position closed prematurely.

It is worth noting that pros in the market, big players, will intentionally drive the price down to a point where most safe traders might have placed stops in order to have those stops executed. This is actually a strategy to "clean out the stops" and garners a better price for them from the flood of market orders that get executed as a result. When this is obvious it makes a very good point for a daytrader to jump in with a long position trade to catch the resulting rebound of the price.

There are good technical stop positions that are sort of "traditional" to watch for. I have learned to place a stop then adjust it a bit farther out from where I first considered it as my stops often get nailed to the penny and I miss out on further gains.

For the record, this is partly why I have migrated to daytrading as there is no stop order in place, or at least not one that is likely lto get hit unless I want out of the trade at that price. I should be placing a worst case stop for each trade opened just in case my connection fails but I am lazy as it takes and extra step and I would rather watch the price move along and exit quickly than have another step between me and a clean exit, even though it can only be one click to cancel.

The profitable applications of the VTSO for me were the longer day trades. I have not used them recently though. What I did was forecast a move of a stock price early in the day, place the order to buy then place the VTSO at a certain distance from the price. If my stop was hit then I was wrong and wanted out anyway, if the price moved up then my stop moved along with it. I might use a 20 to 50 cent VTSO for these. I would set these and shut down my platform and go for lunch or do what ever I might do in the afternoon. then check them at the end of the day. Depending on my confidence I might let them go overnight. I got lucky doing that once with a $6 gap up in price the next moring...I actually thought that there was a problem and could not figure out why my account balance jumped so high. As soon as I did I dumped the stock as it should not have been so high, I was right. That was when I realised how easily I could have been on the wrong side of the gap and lost as much as I gained, at least on paper, until I sold.

I now consider these to catch some of the afternoon runs that take hours to resolve,
I have yet to try them again though. One of my primary tenents is to remove emotion from the trade, that was the main reason I used the VTSO, that and time management.


Final Comment:

I don't recall if this option is available in the basic browser platfomr or the Webtrader, it may not be. I do know that they will not allow limit or VTSO's in anything other than even lots of 100 shares...it's been a while but limit orders might also not be allowed for odd lots either. In any case this is something that you should check with your broker about as some even charge different commissions based on the order type.

I will be considering stepping up to the Questrader Elite in February as it gives some more automation and alerts that might be nice to have as well as for different methods of entering trades right form the quotes.

Jeff.