Ask Colin

I read in an article to place a stop order 10 ticks above a high. What do

This seems to be a breakout system. The idea is to try to filter out minor temporary breakouts, so trying to ensure that there is a trend before pulling the trigger.

Stop

The author is referring to a type of stop order that is available in US markets, but not in Australia, to my knowledge. A stop order is any order to a broker to do something for you, without further reference to you, if a certain event happens in the market. In other words it is an order given in advance, contingent on an event happening. It normally stays in place until you cancel it, unless you specify the time period for which it is valid.

Most people have only ever heard of a stop-loss order and indeed this is the most common one. In the case of a stop-loss order, you buy at a price and set a sell-on-stop order at a price below your entry price. If the market trades at or below the stop price, the broker sells you out immediately. In some cases you may specify the price he sells at, but generally it is an order to sell at the market (hit the bid).

In the case of a short sale (see Articles page Long, Short and Short Selling), you would sell short at a price and set a buy-on-stop order at a higher price. This is an order to the broker to buy your position back immediately, if the market trades at or above the stop.

So, you can clearly have an order to sell-on-stop (stop-loss for a long position) or to buy-on-stop (stop-loss for a short position).

It is only a small step from there to realise that you could use a stop order to open a trade as well as close it, providing you can define a price where the broker is to act.

This is what the author is doing in his article. Putting aside "tick" for a moment, he defines a price above the two highs and gives the broker a buy-on-stop order. This is an order to buy if the market trades at or above the stop level. Similarly, for his short sale, the order this time is a sell-on-stop order. This is an order to sell short if the market trades at or below the stop level.

You may, of course set two stops at once: a buy stop to get you into the trade if a price is traded and a stop-loss order to take you out of the trade if the market trades at a defined lower price than your entry price. The stop-loss has no effect unless the buy order has already been activated. The same can be done for a short sale.

Tick

This is a term that is used widely, but rarely seen defined. I suspect some people misuse it at times, or at least use it rather loosely. A tick is simply the smallest price increment that you can bid above the current bid. In Australian shares this is generally a tenth of a cent, but for higher priced shares it will be a whole cent. Most Internet trading systems will have this in their rules for orders they will accept, but the term "tick" is not much used in the Australian stock market.

In the US stock market, it will also vary depending on the price of the share, I think. They trade in fractions of a dollar, but are changing to decimal, so discussion of their system is not that useful here.

In derivative markets, such as futures, there will be rules again for the minimum bid you may make above the current bid. It may be one point, a tenth of a point, or even a hundredth of a point, depending on the futures contract. In our bond and bill markets, the common term for a tick is a "basis point" - one hundredth of one percent of the interest rate (expressed as the interest rate subtracted from 100 for the price of the futures contract). Hence, if the interest rate is 5% and the RBA moves it 25 basis points upward, the new interest rate is 5.25%. The futures contract price would be quoted as 95.00 moving to 94.75.

Keyword: